EX-13 9 doc9.txt [GRAPHIC OMITED] [GRAPHIC OMITED] SYMONS INTERNATIONAL GROUP, INC. 2002 ANNUAL REPORT SYMONS INTERNATIONAL GROUP, INC. ANNUAL REPORT TO SHAREHOLDERS DECEMBER 31, 2002 CORPORATE PROFILE Symons International Group, Inc. owns insurance companies principally engaged in the sale of nonstandard automobile insurance. Superior Insurance Company of Tampa, Florida and Pafco General Insurance Company of Indianapolis, Indiana underwrite nonstandard automobile insurance in the United States. Nonstandard automobile insurance is marketed and sold through independent agents to drivers who are unable to obtain coverage from insurers at standard or preferred rates. The Company was previously engaged in the crop insurance business through its subsidiary, IGF Insurance Company. On June 6, 2001, the Company exited the crop insurance business when IGF Insurance Company sold its crop insurance operations to a third party. Accordingly, the financial statements included in this report reflect the results of the crop insurance segment as "discontinued operations". The common stock of Symons International Group, Inc. trades on the OTC Bulletin Board under the symbol "SIGC.OB".
TABLE OF CONTENTS PAGE ------------------------------------------------------------------------------------- ---- Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Chairman's Report to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . 21 Reports of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . 45 Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Roster of Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . . . 47 Subsidiary and Branch Office Locations. . . . . . . . . . . . . . . . . . . . . . . . 48
FINANCIAL HIGHLIGHTS For the years ended December 31, (In thousands, except per share data) 2002 2001 2000 1999 1998 ---------- ---------- ---------- --------- --------- Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . $ 107,775 $ 161,092 $ 174,461 $236,401 $310,164 Net operating earnings (loss) from continuing operations (1) . . . . . . (16,047) (14,574) (18,997) (48,374) (335) Net earnings (loss) from discontinued operations . . . . . . . . . . . . - (2,156) (17,041) (15,373) (6,484) Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . (35,260) (32,892) (88,425) (80,816) (14,417) Basic operating earnings (loss) per share from continuing operations (1) (1.55) (1.40) (1.83) (4.66) (0.03) Basic earnings (loss) per share from discontinued operations. . . . . . - (0.21) (1.64) (1.48) (0.62) Basic earnings (loss) per share. . . . . . . . . . . . . . . . . . . . . (3.40) (3.17) (8.51) (7.78) (1.39) Shareholders' equity (deficit) . . . . . . . . . . . . . . . . . . . . . (178,879) (144,012) (112,445) (24,980) 61,995 Return on average equity (2) . . . . . . . . . . . . . . . . . . . . . . N/A N/A N/A N/A (20.5%) Book value (deficit) per share . . . . . . . . . . . . . . . . . . . . . (17.22) (13.87) (10.83) (2.41) 5.97 Market value per share . . . . . . . . . . . . . . . . . . . . . . . . . 0.03 0.07 0.36 1.44 7.25 (1) Operating earnings and per share amounts exclude amortization, interest, taxes, realized capital gains and losses, minority interest, and any extraordinary items. (2) Return on average equity cannot be calculated due to the accumulated deficit in shareholders' equity in 2002, 2001, 2000 and 1999.
SYMONS INTERNATIONAL GROUP, INC. [GRAPHIC OMITED] [GRAPHIC OMITED] CORPORATE STRUCTURE Chairman's Report to Shareholders May 27, 2003 Dear Fellow Shareholder: Despite a difficult market that permeated the insurance industry since September 11, 2001, we are seeing improvement in our company's operations as a result of key changes we have made. The company reached a pinnacle in its operations in the late 1990's. We were writing premiums in excess of $500 million and realizing pre-tax profits in excess of $20 million. The latter part of that era saw a change in the underwriting of insurance in those fields that we were most active, nonstandard auto insurance and crop insurance. The largest writer in the nonstandard field with premiums in the area of $10 billion decided in the latter half of the 90's that it would undertake a program of rate cutting to gain market share of the business. This forced other nonstandard insurers to reduce or hold the rates at levels that were not economical in an attempt to maintain business that would be otherwise lost. The results were that we, like others in the same field of insurance activity, struggled with increasing losses. This came at a time when the markets were unable to effectively increase rates to meet the added cost of deteriorating loss experience. We cut costs of operations in an effort to produce a profitable portfolio of this class of business. We took the dramatic step of releasing employees, including several of the top personnel in the company. We culminated these changes in 2002 by appointing Douglas Symons as Chief Executive Officer of Goran Capital Inc. Further, the company stopped writing business in jurisdictions where rates were inadequate and concentrated on renewing the business that was performing best. We received some help earlier on when the principal writer of nonstandard auto insurance decided that the loss of profits they encountered by their zeal to capture a larger share of the business was not favoring them. This return to a more normal market assisted us, and along with other changes we made, we now see improving results. We put the business of IGF on the block two years ago and sold it to a leading writer of this class of insurance. 2002 was their first full year with the business they acquired from us. They were hit with net losses that exceeded earned premiums by approximately $50 million, which is an indication of the feast or famine nature of the crop insurance business. It has been a hard grind over the past several years. Not only have we had to deal with the matters I mentioned, the insurance industry has been in turmoil since September 11, 2001 when terrorist losses exceeded $150 billion. We have reduced the number of staff from 342 to 209 and our marketing, claims, and accounting departments have been placed under new management. They are doing an admirable job and with the strong executive team Douglas has assembled, I am encouraged that we are on the road back to sensibility and profits. The Board of Directors have stuck with us through these trying times and I would be remiss if I did not thank them and congratulate the executives of the company and our employees for the brightening picture I feel they are bringing to us. G. Gordon Symons SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA SYMONS INTERNATIONAL GROUP, INC. The selected consolidated financial data presented below is derived from the consolidated financial statements of the Company and its subsidiaries for the years ended December 31. This information should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this report. All information is in thousands, except share, per share and ratio data.
2002 2001 2000 1999 1998 ---------- ---------- ---------- --------- --------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Gross Premiums Written. . . . . . . . . . . $ 107,775 $ 161,092 $ 174,461 $236,401 $310,164 Net Premiums Earned . . . . . . . . . . . . 37,662 76,947 137,706 249,094 264,022 Fee Income. . . . . . . . . . . . . . . . . 9,341 12,295 14,140 15,185 16,431 Net Investment Income . . . . . . . . . . . 4,139 6,286 10,074 12,242 12,098 Income (Loss) from Continuing Operations. . $ (35,260) $ (30,736) $ (71,384) $(65,443) $ (7,933) Income (Loss) from Discontinued Operations. - (2,156) (17,041) (15,373) (6,484) ---------- ---------- ---------- --------- --------- Net Income (Loss) . . . . . . . . . . . . . $ (35,260) $ (32,892) $ (88,425) $(80,816) $(14,417) ========== ========== ========== ========= ========= PER COMMON SHARE DATA: Basic Income (Loss) from Continuing Operations . . . . . . . . . . . . . . . $ (3.40) $ (2.96) $ (6.87) $ (6.30) $ (.76) Basic Income (Loss) from Discontinued Operations . . . . . . . . . . . . . . . - (0.21) (1.64) (1.48) (.62) ---------- ---------- ---------- --------- --------- Basic Net Income (Loss) . . . . . . . . . . $ (3.40) $ (3.17) $ (8.51) $ (7.78) $ (1.38) ========== ========== ========== ========= ========= Basic Weighted Average Shares Outstanding . 10,385 10,385 10,385 10,385 10,402 ========== ========== ========== ========= ========= RATIOS: Loss and LAE Ratio (1). . . . . . . . . . . 127.9% 91.5% 82.3% 92.7% 82.5% Expense Ratio (2) . . . . . . . . . . . . . 30.1% 36.7% 38.8% 31.6% 22.2% ---------- ---------- ---------- --------- --------- Combined Ratio (3). . . . . . . . . . . . . 158.0% 128.2% 121.1% 124.3% 104.7% ========== ========== ========== ========= ========= CONSOLIDATED BALANCE SHEET DATA: Total Investments . . . . . . . . . . . . . $ 54,673 $ 107,027 $ 134,140 $201,887 $220,366 Total Assets. . . . . . . . . . . . . . . . 148,072 244,132 287,957 373,812 448,885 Loss and Loss Adjustment Expense Reserves . 67,204 81,142 108,117 152,455 134,024 Trust Preferred Securities. . . . . . . . . 135,000 135,000 135,000 135,000 135,000 Total Shareholders' Equity (Deficit). . . . (178,879) (144,012) (112,445) (24,980) 61,995 Book Value (Deficit) Per Share. . . . . . . (17.22) (13.87) (10.83) (2.41) 5.97 (1) Loss and LAE Ratio: The ratio of loss and loss adjustment expenses ("LAE") incurred during the period, as a percentage of premiums earned. (2) Expense Ratio: The ratio of policy acquisition, general and administrative expenses less billing fees, as a percentage of premiums earned. (3) Combined Ratio: The sum of the Loss and LAE Ratio and the Expense Ratio.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS All statements, trend analyses, and other information herein contained relative to markets for the Company's products and/or trends in the Company's operations or financial results, as well as other statements including words such as "anticipate," "could," "feel(s)," "believes," "plan," "estimate," "expect," "should," "intend," "will," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) the effect on customers, agents, employees and others due to the Company's receipt of going concern opinions from its accountants; (ii) general economic conditions, including prevailing interest rate levels and stock market performance; (iii) factors affecting the Company's nonstandard automobile operations such as rate increase approval, policy renewals, new business written and premium volume; and (iv) the factors described in this section and elsewhere in this report. OVERVIEW Symons International Group, Inc. (the "Company") owns insurance companies that underwrite and market nonstandard private passenger automobile insurance. The Company's principal insurance company subsidiaries are Pafco General Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and IGF Insurance Company ("IGF"). The Company is a 73.8% owned subsidiary of Goran Capital Inc. ("Goran"). THE COMPANY'S ACCOUNTANTS HAVE ISSUED A GOING CONCERN OPINION The Company's accountants have issued reports on their audits of the Consolidated Financial Statements of the Company as of December 31, 2001 and December 31, 2002 which address doubt as to the Company's ability to continue as a going concern given the recurring operating losses experienced by the Company over the past few years and the Company's net capital deficiency. See - Liquidity and Capital Resources for a discussion of management's plans to address these matters. STRATEGIC ALIGNMENT As previously announced, in the fourth quarter of 2000, management initiated a strategic review of the Company's operations. This review resulted in a plan to divest the Company's crop insurance segment, allowing management to focus on nonstandard automobile insurance. In June 2001, the Company sold its crop segment and adopted a plan to wind-down the remaining crop segment obligations. Accordingly, financial results of the crop insurance segment are presented as discontinued operations in the Company's financial statements. Continuing operations of the Company consist of the single nonstandard automobile insurance segment. NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty"), and Superior American Insurance Company ("Superior American") are engaged in the writing of insurance coverage for automobile physical damage and liability policies for nonstandard risks. Nonstandard risk insureds are those individuals who are unable to obtain insurance coverage through standard market carriers due to factors such as poor premium payment history, driving experience or violations, particular occupation or type of vehicle. The Company offers several different policies that are directed towards different classes of risk within the nonstandard market. Premium rates for nonstandard risks are higher than for standard risks. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment and grows when the standard coverage becomes more restrictive. Nonstandard policies have relatively short policy periods and low limits of liability. Also, since the nonstandard automobile insurance business typically experiences lower rates of retention than standard automobile insurance, the number of new policyholders underwritten by nonstandard automobile insurance carriers each year is substantially greater than the number of new policyholders underwritten by standard carriers. RESULTS OF OPERATIONS OVERVIEW 2002 Compared to 2001 For the year 2002, the Company reported a loss on continuing operations of $(35,260,000) or $(3.40) per share (basic and diluted). Loss on continuing operations for the year 2001 was $(30,736,000) or $(2.96) per share (basic and diluted). Loss before income taxes and distributions on minority interest was $(19,236,000) and $(15,930,000) for 2002 and 2001, respectively. Operating earnings (loss) from continuing operations, measured as income/(loss) before amortization, interest, taxes, realized capital gains and losses and minority interest was $(16,047,000) or $(1.55) per share (basic and diluted) in 2002 and $(14,574,000) or $(1.40) per share in 2001 (basic and diluted). The loss from discontinued operations was nil and $(2,156,000) for 2002 and 2001, respectively. The Company is continuing to implement rate increases, improve underwriting actions and improve the claims department process and procedures to achieve profitability. A number of systems have been automated and service problems have been eliminated or significantly reduced. 2001 Compared To 2000 For the year 2001, the Company reported a loss on continuing operations of $(30,736,000) or $(2.96) per share (basic and diluted). Loss on continuing operations for the year 2000 was $(71,384,000) or $(6.87) per share (basic and diluted), which included a one-time write down of goodwill in the amount of $33,464,000. Loss before income taxes and distributions on minority interest was $(15,930,000) and $(59,946,000) for 2001 and 2000, respectively. Operating earnings (loss) from continuing operations, measured as income/(loss) before amortization, interest, taxes, realized capital gains and losses and minority interest was $(14,574,000) or $(1.40) per share (basic and diluted) in 2001 and $(18,997,000) or $(1.83) per share in 2000 (basic and diluted). The loss from discontinued operations was $(2,156,000) and $(17,041,000) for 2001 and 2000, respectively. Underwriting losses and operating costs in excess of original estimates contributed to the losses in 2001. YEARS ENDED DECEMBER 31, 2002 AND 2001 Gross Premiums Written Gross premiums written decreased 33.1% or $53,317,000 in 2002 from 2001 levels. Premium rate increases of approximately 11.0% were implemented throughout 2002 and were offset by a reduction in policies in force of 46.9%. The primary reasons for this decline were the Company's withdrawal from certain highly competitive markets, additional strict underwriting initiatives intended to increase profitability, and the regulatory and strategic actions accompanied with reduction in policies in force. Net Premiums Written Net premiums written represent the portion of premiums retained by the Company after consideration for risk sharing through reinsurance contracts. As a result of declines in surplus in the Company's insurance subsidiaries and to manage overall risk retention, in 2000 the Company entered into a reinsurance agreement to cede a portion of its gross written premiums to National Union Fire Insurance Company ("National") of Pittsburgh, Pennsylvania, an unrelated third party. During 2002, the Company ceded approximately 71.7% of its gross written premiums on new and renewal business to reinsurers under a quota share reinsurance contract that was effective January 1, 2000. Net Premiums Earned Net premiums earned decreased 51.1% or $39,285,000 for the year ended December 31, 2002 as compared to the same period in 2001. Premiums are earned ratably over the term of the underlying insurance contracts. The reduction in net premiums earned is reflective of the overall reduction in gross premiums written and the increase in ceded premiums. Fee Income Fee income is derived from installment billings and other services provided to policyholders. For the year ended December 31, 2002, fee income decreased 24.0% or $2,954,000. The reduction in fee income is attributed to the reduction of insurance policies in force of 46.9% and the overall decline in written premium. Net Investment Income Net investment income decreased 34.1% or $2,147,000 in 2002 as compared to 2001. This decrease is reflective of the decline in invested assets during a period of declining premiums, the liquidation of investments to pay prior year losses settled in 2002 and to settle the reinsurance payable to National. Furthermore, return on investments deteriorated due to a highly volatile market dominated by unfavorable economic conditions due to the worldwide recession. Net Realized Capital Losses Net realized capital losses were $(2,807,000) in 2002 as compared to net realized capital losses of $(1,185,000) in 2001. Capital losses resulted primarily from the continued liquidation of longer duration fixed income securities in 2002 in order to fund operational expenses, claim payments, reinsurance payments to National under unfavorable market conditions and permanent impairment of other than temporary investments. Losses and Loss Adjustment Expenses The loss and loss adjustment expense ("LAE") ratio for the Company for the year ended December 31, 2002, was 127.9% of net premiums earned as compared to 91.5% of net premiums earned for 2001. A portion of LAE, unallocated loss adjustment expense ("ULAE"), is not ceded as part of the quota share reinsurance contract mentioned above and accounts for approximately 5 points of the increased loss ratio in 2002 with the remainder of the increase due to adverse loss experience. Policy Acquisition and General and Administrative Expense The Company reduced policy acquisition and general and administrative expenses for the year 2002 to $20,677,000 from the 2001 level of $40,535,000, a reduction of approximately 49.0%. This reduction is reflective of the decline in gross written premiums, an increase in ceding commissions associated with the quota share reinsurance contract and overall operating expense reduction initiatives. As a percentage of gross premiums earned, the Company experienced a decrease in its operating expense ratio, net of fee income, from 36.7% in 2001 to 30.1% in 2002. Interest expense The Company obtained lines of credit from Granite Reinsurance Company Ltd. ("Granite Re"), a related party, in the amount of $2.5 million and $1.0 million in December 31, 2001 and October 2002, respectively. At December 31, 2002, a total of $2.98 million was outstanding. These line of credit notes bear interest at the rate of prime plus 5.25% for a total of 9.5% at December 31, 2002. Interest only payments are due monthly. The $2.5 million of the outstanding balance is due December 20, 2004 and the remaining balance of $480,000 is due on November 30, 2004. As of December 31, 2002 the interest expense on the lines of credit totaled $211,000. Amortization of Deferred Financing Costs Amortization expense totaled $171,000 for the years-ended December 2002 and 2001. Income Taxes At December 31, 2002 the Company's net deferred tax assets were fully offset by a 100% valuation allowance that resulted in no tax benefit in 2002. YEARS ENDED DECEMBER 31, 2001 AND 2000 Gross Premiums Written Gross premiums written decreased 7.7% or $13,369,000 in 2001 from 2000 levels. Premium rate increases of approximately 24.8% were implemented throughout 2001 that were offset by a reduction in policies in force of 23.3%. The decline in gross premiums also resulted from the Company exiting certain highly competitive markets and instituting other underwriting initiatives intended to increase profitability, which had the effect of reducing premium. Regulatory action in certain states also limited premiums written. Net Premiums Written Net premiums written represent the portion of premiums retained by the Company after consideration for risk sharing through reinsurance contracts. As a result of losses in the Company's insurance subsidiaries and to manage overall risk retention, the Company entered into a reinsurance agreement to cede a portion of its gross written premiums to a third party. During 2001, the Company ceded approximately 54% of its gross written premiums on new and renewal business to the reinsurers, under a quota share reinsurance contract that was effective January 1, 2000. In addition, the Company ceded a portion of its unearned premium reserve bringing the total cession to 79% in 2001. Net Premiums Earned Net premiums earned decreased 44.1% or $60,759,000 for the year ended December 31, 2001 as compared to the same period in 2000. Premiums are earned ratably over the term of the underlying insurance contracts. The reduction in net premiums earned is reflected of the overall reduction in gross premiums written and the increase in ceded premiums. Fee Income Fee income is derived from installment billings and other services provided to policyholders. For the year ended December 31, 2001, fee income decreased 13.0% or $1,845,000 as compared to the same period in 2000. The reduction in fee income was attributed to the reduction of insurance policies in force of 23.3% and the overall decline in written premium. Net Investment Income Net investment income decreased 37.6% or $3,788,000 in 2001 as compared to 2000. This decrease reflected the decline in invested assets during a period of declining premiums and the liquidation of investments to pay prior year losses settled in 2001. Furthermore, return on investments deteriorated due to a highly volatile market dominated by unfavorable economic conditions due to the worldwide recession and effects from the September 2001 terrorist attacks. Net Realized Capital Losses Net realized capital losses were $(1,185,000) in 2001 as compared to net realized capital losses of $(5,972,000) in 2000. Capital losses resulted from the liquidation of longer duration fixed income securities in 2001 in order to rebalance the investment activities in the portfolio. These transactions resulted in higher cash proceeds that were reinvested in shorter duration investment instruments. Capital losses were also realized due to the continued liquidation of investments to fund operations and claim payments under unfavorable market conditions. Losses and Loss Adjustment Expenses The loss and LAE ratio for the Company for the year ended December 31, 2001, was 91.5% of net premiums earned as compared to 82.3% of net premiums earned for 2000. A portion of LAE, ULAE, is not ceded as part of the quota share reinsurance contract mentioned above and accounts for approximately 4 points of the increased loss ratio in 2001 with the reminder of the increase due to adverse loss expense. Policy Acquisition and General and Administrative Expense The Company reduced policy acquisition and general and administrative expenses for the year 2001 to $40,535,000 from the 2000 level of $67,538,000, a reduction of approximately 40%. This reduction is reflected the decline in gross written premiums, an increase in ceding commissions associated with the quota share reinsurance contract and overall operating expense reduction initiatives. As a percentage of gross premiums earned, the Company experienced a decrease in its operating expense ratio, net of fee income, from 38.8% in 2000 to 36.7% in 2001. This decrease in the expense ratio is the result of reduced operating expense initiatives and an increase in ceding commissions earned under the quota share reinsurance contract. Amortization of Intangibles Amortization expense decreased nearly 100%, or $34,806,000, in 2001 as compared to 2000 as the goodwill was written to zero at December 31, 2000. Income Taxes At December 31, 2001 the Company's net deferred tax assets were fully offset by a 100% valuation allowance that resulted in no tax benefit in 2001. LIQUIDITY AND CAPITAL RESOURCES The primary source of funds available to the management and holding companies are fees from policyholders and management fees. Superior Insurance Group, Inc. ("Superior Group") collects billing fees charged to Pafco policyholders, who elect to make their premium payments in installments, and managing general agent ("MGA") fees charged to Superior policyholders. Superior Group also receives management fees under its management agreement with its insurance subsidiaries. When the Florida Department of Insurance ("FDOI") approved the acquisition of Superior by Superior Group, it prohibited Superior from paying any dividends (whether extraordinary or not) for four years from the date of acquisition (May 1, 1996) without the prior written approval of the FDOI, which restriction expired in April 2000. As a result of regulatory actions taken by the Indiana Department of Insurance ("IDOI") with respect to Pafco and IGF, those subsidiaries may not pay dividends without prior approval by the IDOI. Pafco cannot pay extraordinary dividends, within the meaning of the Indiana Insurance Code, without the prior approval of the Indiana Insurance Commissioner. The management fees charged to Pafco, Superior and IGF are subject to review by the IDOI and FDOI. The nonstandard automobile insurance subsidiaries' primary source of funds is premiums, investment income and proceeds from the maturity or sale of invested assets. Such funds are used principally for the payment of claims, payment of claims settlement costs, operating expenses (primarily management fees), commissions to independent agents, premium taxes, dividends and the purchase of investments. There is variability in cash outflows because of uncertainties regarding settlement dates for liabilities for unpaid losses. Accordingly, the Company maintains investment programs intended to provide adequate funds to pay claims. During 2002 and 2001, due to reduced premium volume, the Company liquidated investments to pay claims. The Company historically has tried to maintain duration averages of 3.5 years. However, the reduction in new funds due to lower premium volume caused the Company to shorten the duration of its investments. The Company may incur additional costs in selling longer term bonds to pay claims, as claim payments tend to lag premium receipts. Due to the decline in premium volume, the Company experienced a reduction in its investment portfolio, but to date has not experienced any problems meeting its obligations for claims payments. The Company has obtained a revolving credit facility ("Facility") with Granite Reinsurance Company Ltd., a related party, in the amount of $2.5 million due December 20, 2004, and $1.0 million due November 30, 2004, in December 2001 and October 2002, respectively. The terms of the Facility call for monthly interest payments at the prime rate (as printed in the Wall Street Journal on the first business day of each month) plus 5.25% (the total rate was 9.5% at March 1, 2003) computed on an annual basis and not to exceed 18% per annum calculated on the average principal outstanding each month. On August 12, 1997, the Company issued through a wholly owned trust subsidiary $135 million aggregate principal amount in trust originated preferred securities (the "Preferred Securities"). The Preferred Securities have a term of 30 years with semi-annual interest payments of $6.4 million that commenced February 15, 1998. The Company may redeem the Preferred Securities in whole or in part 10 years after the issue date. The Company elected to defer the semi-annual interest payments due in February and August 2000, 2001, and 2002 and expects to continue this practice through 2003 and 2004. The payment due in February 2003 was deferred. The unpaid interest installment amounts accrue interest at 9.5%. The following table sets forth (in thousands) the obligations of the Company under the Preferred Securities and other contractual obligations as of December 31, 2002:
Contractual Obligations Payments due by Period ----------------------- ---------------------- 1 - 3 3 - 5 Total Less than 1 year years years More than 5 years -------- ----------------- ------- ------- ------------------ Interest payments under the Preferred Securities. . . . . . . . . . . . . $378,929 - $96,779 $25,650 $ 256,500 -------- ----------------- ------- ------- ------------------ Principal payments under the Preferred Securities $135,000 - - - $ 135,000 -------- ----------------- ------- ------- ------------------ Principal & Interest under the Facility . . . . . $ 3,546 $ 283 $ 3,263 - - ------------------------------------------------- -------- ----------------- ------- ------- ------------------
The Company may continue to defer semi-annual interest payments for up to an aggregate of five (5) years as permitted by the indenture for the Preferred Securities. All of the deferred interest (approximately $84 million, if all payments due in 2003 and 2004 are deferred) will become due and payable in February 2005. The Company relies on the payment of finance and service fees by its subsidiaries to fund its operations, including its payment of interest on the Preferred Securities. Certain state regulators, including the FDOI, have issued orders prohibiting the Company's subsidiaries from paying such fees to the Company. In the event such orders continue, the Company may not have sufficient revenue to fund its operations or to pay the deferred interest on the Preferred Securities. Such failure to pay could result in a default under the indenture and acceleration of the payment of the Preferred Securities. The trust indenture contains certain restrictive covenants based upon the Company's consolidated coverage ratio of earnings before interest, taxes, depreciation and amortization (EBITDA). If the Company's EBITDA falls below 2.5 times consolidated interest expense (including Preferred Securities distributions) for the most recent four quarters, the following restrictions become effective: - The Company may not incur additional indebtedness or guarantee additional indebtedness. - The Company may not make certain restricted payments including making loans or advances to affiliates, repurchasing common stock or paying dividends in excess of a stated limitation. - The Company may not increase its level of non-investment grade securities defined as equities, mortgage loans, real estate, real estate loans and non-investment grade fixed income securities. These restrictions currently apply, as the Company's consolidated coverage ratio was (0.95) in 2002, and will continue to apply until the Company's consolidated coverage ratio complies with the terms of the trust indenture. The Company complied with these additional restrictions as of December 31, 2001 and 2002 and is in compliance as of May 9, 2003. Net cash used by operating activities in 2002 aggregated $(61,652,000) compared to $(21,966,000) in 2001 due to reduced cash provided by operations as a result of lower premium volumes and the reduced number of policies in force. The Company experienced, beginning in the fourth quarter of 2001 and continuing in January and February 2002, sustained adverse loss experience on a substantial portion of its new business written in certain markets. In late February and early March 2002, the Company commenced further analysis of loss ratios by individual agency and a review of claim settlement procedures. Based on this and other analysis, during 2002 the Company took a number of actions to improve the financial position and operating results of the Company including: - Eliminated reinstatements in all markets, i.e., upon policy cancellation, the insured must obtain a new policy at prevailing rates and underwriting guidelines; - Terminated or placed on new business moratorium several hundred agents whose loss ratios were abnormally high when compared to the average for the remaining agents (these agents accounted for approximately 16% of the total gross written premium in 2001); - Increased underwriting requirements in certain markets including higher down payments, new policy fees and shorter policy terms; - Hired a new vice president of claims with significant auto claims experience to improve the claims function. The above actions were followed by: - Replacement of the president of the non-standard automobile business; - Consolidation of all underwriting activities, premium accounting and agency licensing to the Indianapolis, IN office from Atlanta, GA; - Closing of regional offices in Denver, CO; Virginia Beach and Alexandria, VA; Glendale, CA; and Jacksonville, FL; - Replacement of the claims department national litigation manager; - Replacement of the marketing manager and the product manager; - Heavy focus on the improvement of process and customer service; and - Continued transition to an improved policy processing system. Shareholders' equity reflected a deficit of $(179) million at December 31, 2002, which does not reflect the statutory surplus upon which the Company conducts its various insurance operations. The Company's insurance subsidiaries, not including IGF, had statutory surplus of approximately $13.0 million as reflected in the Company's insurance subsidiaries annual statutory financial statements filed on March 1, 2003. Following the inclusion in the reserve amounts pursuant to the consulting actuary's analysis, the Company had statutory surplus of $3.0 million as of December 31, 2002. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's independent auditor, it was determined that reserves for losses and loss adjustment expenses for Superior and Pafco should be increased. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets, were recorded in the 2002 audited statutory financial statements filed for Superior and Pafco with the FDOI and the IDOI, respectively. Given the financial position and loss experience of the Company over the past several years as described above, the Company's accountants have issued an opinion based on their audit of the December 31, 2002 Consolidated Financial Statements which includes an emphasis paragraph that addresses the question of whether or not the Company can continue as a going concern. The Company's plans to improve financial results are described above. EFFECTS OF INFLATION Due to the short time that claims are outstanding in the product lines the Company underwrites, inflation does not pose a significant risk to the Company. SIGNIFICANT ACCOUNTING POLICIES The Company's financial statements reflect the selection and application of accounting policies that require management to make significant estimates and assumptions. Management believes that the following is the more critical judgment area in the application of our accounting policies that currently affect the Company's financial condition and results of operations. The reserve for losses and loss adjustment expenses includes estimates for reported unpaid losses and loss adjustment expenses, including a portion attributable to losses incurred but not reported. These reserves are not discounted. Reserves are established using individual case-basis evaluations and statistical analysis as claims are reported. Those estimates are subject to the effects of trends in loss severity and frequency. While management believes the reserves make reasonable provisions for unpaid loss and loss adjustment expense obligations, those provisions are necessarily based on estimates and are subject to variability. Changes in the estimated reserves are charged or credited to operations, as additional information on the estimated amount of a claim becomes known during the course of its settlement. The gross reserve for losses and loss adjustment expenses is reported net of anticipated receipts for salvage and subrogation. See Note 7 to the Consolidated Financial Statements for additional disclosure regarding the reserve for losses and loss adjustment expenses. The variation between the estimated loss and loss adjustment expenses and actual experience can be material. PRIMARY DIFFERENCES BETWEEN GAAP AND SAP The financial statements contained herein have been prepared in conformity with generally accepted accounting principles ("GAAP") which differ from statutory accounting practices ("SAP") prescribed or permitted for insurance companies by regulatory authorities in the following respects: (i) certain assets are excluded as "Nonadmitted Assets" under statutory accounting; (ii) costs incurred by the Company relating to the acquisition of new business are expensed for statutory purposes; (iii) the investment in wholly-owned subsidiaries is consolidated for GAAP rather than valued on the statutory equity method in which the net income or loss and changes in unassigned surplus of the subsidiaries is reflected in net income for the period rather than recorded directly to unassigned surplus; (iv) fixed maturity investments are reported at amortized cost or market value based on their National Association of Insurance Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment expenses and unearned premium reserves are recorded net of their reinsured amounts for statutory accounting purposes; (vi) deferred income taxes are recognized as specified by statutory guidance; and (vii) credits for reinsurance are recorded only to the extent considered realizable. NEW ACCOUNTING STANDARDS The NAIC adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which replaced the Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting effective January 1, 2001. The IDOI and the FDOI have adopted the Codification. The changes in statutory accounting practices resulting from codification that impacted the Company's insurance subsidiaries, among other things, limited the statutory carrying value of electronic data processing equipment and deferred tax assets in determining statutory surplus. In June 2001, the Financial Accounting Standards Board (the "Board") finalized FASB Statements No. 141, Business Combinations, No. 142, Goodwill and Other Intangible Assets, and No. 143, Accounting for Asset Retirement Obligations. In August 2001, the Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. These new standards were effective in 2002 and did not have a material impact on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148) which amends SFAS 123, "Accounting for Stock-Based Compensation" (SFAS 123) to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. The Company has decided to continue to account for stock-based employee compensation using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and interpretations as permitted under SFAS 148. Accordingly, no compensation expense is recorded if the current market price of the underlying stock does not exceed the exercise price at the date of grant. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Insurance company investments must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications in federal, state and municipal obligations, corporate bonds, preferred and common securities, real estate mortgages and real estate. The investment portfolios of the Company at December 31, 2002 consisted of the following (in thousands):
2002 ------- Cost or Market TYPE OF INVESTMENT Amortized Cost Value -------------- ------- Fixed maturities: U. S. Treasury securities and other obligations of the United States government or agencies $17,814 $18,355 Obligations of states and political subdivisions 4,828 5,005 Corporate securities 13,043 13,368 ------- ------- Total fixed maturities 35,685 36,728 Common stocks 9,667 6,404 Short-term investments 8,495 8,495 Other invested assets 3,046 3,046 ------- ------- $56,893 $54,673 ======= =======
The following table sets forth the composition of the fixed maturity securities portfolio of the Company by time to maturity as of December 31 (in thousands):
2002 2001 ---- ---- Percent Total Percent Total Time to Maturity Market Value Market Value Market Value Market Value ---------------------------------- -------------- -------------- ------------- ------------- 1 year or less . . . . . . . . . . $ 8,866 24.1 $ 7,998 10.2 More than 1 year through 5 years . 12,077 32.9 25,950 33.3 More than 5 years through 10 years 7,492 20.4 20,477 26.3 More than 10 years . . . . . . . . 3,288 9.0 4,091 5.3 -------------- -------------- ------------- ------------- 31,723 86.4 58,516 75.1 Mortgage-backed securities . . . . 5,005 13.6 19,380 24.9 -------------- -------------- ------------- ------------- Total. . . . . . . . . . . . . . . $ 36,728 100.0% $ 77,896 100.0% ============== ============== ============= =============
The following table sets forth the ratings assigned to the fixed maturity securities of the Company as of December 31 (in thousands):
2002 2001 ---- ---- Percent Total Percent Total Rating (1) Market Value Market Value Market Value Market Value ----------------------------- -------------- -------------- ------------- ------------- Aaa or AAA. . . . . . . . . . $ 24,677 67.2% $ 51,754 66.4% Aa or AA. . . . . . . . . . . 971 2.6% 3,300 4.2% A . . . . . . . . . . . . . . 4,262 11.6% 9,242 11.9% Baa or BBB. . . . . . . . . . 5,479 14.9% 7,617 9.8% Ba or BB. . . . . . . . . . . 281 0.8% 4,883 6.3% Other below investment grade. 1,058 2.9% 1,100 1.4% -------------- -------------- ------------- ------------- Total . . . . . . . . . . . . $ 36,728 100% $ 77,896 100% ============== ============== ============= ============= (1) Ratings are assigned by Standard & Poor's Corporation, and when not available, are based on ratings assigned by Moody's Investors Service, Inc.
The investment results of the Company's continuing operations for the periods indicated are set forth below (in thousands):
Years Ended December 31, 2002 2001 2000 -------- --------- --------- Net investment income (1) . . . . . . . . . . . $ 4,139 $ 6,286 $ 10,074 Average investment portfolio (2). . . . . . . . $98,613 $123,859 $173,231 Pre-tax return on average investment portfolio. 4.2% 5.1% 5.8% Net realized gains (losses) . . . . . . . . . . $(2,807) $ (1,185) $ (5,972) (1) Includes dividend income received in respect of holdings of common stock. (2) Average investment portfolio represents the average (based on amortized cost) of the beginning and ending investment portfolio.
If interest rates were to increase 10% from the December 31, 2002 levels, the decline in fair value of the fixed maturity securities would not significantly affect the Company's ability to meet its obligations to policyholders and creditors. MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT The Company's investment strategy is to invest available funds in a manner that will maximize the after-tax yield of the portfolio while emphasizing the stability and preservation of the capital base. The Company seeks to maximize the total return on investments through active investment management utilizing third-party professional administrators, in accordance with pre-established investment policy guidelines established and reviewed regularly by the board of directors of the Company. Accordingly, the entire portfolio of fixed maturity securities is available to be sold in response to changes in market interest rates; changes in relative values of individual securities and asset sectors, changes in prepayment risks, changes in credit quality, liquidity needs, as well as other factors. The portfolio is invested in types of securities and in an aggregate duration, which reflect the nature of the Company's liabilities and expected liquidity needs diversified among industries, issuers and geographic locations. The Company's fixed maturity and common equity investments are substantially in public companies. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. For investment securities and debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity date. Additionally, the Company has assumed its available for sale securities are similar enough to aggregate those securities for presentation purposes.
Interest Rate Sensitivity - Principal Amount by Expected Maturity Average Interest Rate (Dollars in thousands) Cost or Amortized Cost Market -------------------------------------------------------------------- Value 2003 2004 2005 2006 2007 Thereafter Total 12/31/02 ------- ------- ------- ------- ------- ------------ --------- --------- ASSETS Available for sale. . $8,733 $4,428 $4,456 $4,728 $2,928 $ 10,412 $ 35,685 36,728 Average interest rate 6.80% 7.20% 6.45% 5.95% 5.95% 6.98% 6.25% 6.25% LIABILITIES Preferred securities. - - - - - $ 135,000 $135,000 $ 9,000 Average interest rate - - - - - 9.5% 9.5% 9.5% Credit Facility . . . - $2,980 - - - - $ 2,980 $ 2,980 Average interest rate - 9.5% - - - - 9.5% 9.5%
REVISED ESTIMATE OF LOSS RESERVES RECORDED IN PRIOR YEARS The Company revised its estimate of the loss reserves recorded in prior years. At end of 2001 the Company's net loss and loss adjustment expense reserves for nonstandard auto insurance were $50,542,000. As claims that occurred prior to year-end 2001 were reported, investigated and settled during 2002, the Company reevaluated and, as necessary, revised its estimates of loss reserves. Based on current information that reserve at the end of 2001 should have been $63,317,000. In part the reserve increase was the result of an unanticipated increase in claim frequency during the fourth quarter of 2001. Because of the normal lag between the occurrence of an accident and the reporting of that accident, the Company did not realize its claim frequency for the fourth quarter of 2001 had increased until those claims were reported during 2002. The Company believes that the frequency increase was caused by an increase in miles driven which resulted from (1) a significant decrease in the price of gasoline, (2) a reluctance of people to fly on commercial airlines because of the September 11, 2001 terrorist attacks, and (3) a general improvement in economic conditions. In addition, during 2002 Superior experienced an unusual number of reopened claims from older accident quarters. At year-end 2001 the Company believed that these claims were closed with no outstanding liability. In response to this unusual activity the Company took appropriate action to enhance its claims function. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's independent auditor, it was determined that reserves for losses and loss adjustment expenses for Superior and Pafco should increased as of December 31, 2002. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets, were recorded in the 2002 audited statutory financial statements filed for Superior and Pafco with the Insurance Department of Florida and the Indiana Department of Insurance, respectively. In the statutory financial statements of the Company's insurance subsidiaries the estimates of gross assumed loss and loss adjustment expense reserves was $59,971,000 and net loss and loss adjustment expense reserves was $37,886,000. Following the adjustment pursuant to the consulting actuary's analysis, the revised estimates of gross loss and loss adjustment expense reserves is $67,204,000 and net loss and loss adjustment expense reserves is $43,145,000. These reserves are based on analysis of historical data. Based on actions taken to enhance the Company's claim function, management anticipates that the majority of claims will be adjusted and settled more quickly which will reduce the overall costs while those claims of a questionable nature will be investigated more thoroughly. Also, the Company is focusing on reducing defense costs and is negotiating more favorable rates from attorneys. Finally, the Company is taking steps to increase the amounts of salvage and subrogation it collects as an offset to paid losses while reducing the expenses associated with collecting those amounts. The business written by the Company did not expose it to highly uncertain exposures such as claims for asbestos-related illnesses, environmental remediation or product liability. The surplus lines insurance written by the Company also did not include these types of highly uncertain exposures.
CONSOLIDATED BALANCE SHEETS As of December 31, 2002 and 2001 (In thousands, except share data) 2002 2001 ---------- ---------- ASSETS Investments available for sale: Fixed maturities, at market . . . . . . . . . . . . . . . . . . . . . $ 36,728 $ 77,896 Equity securities, at market. . . . . . . . . . . . . . . . . . . . . 6,404 14,396 Short-term investments, at amortized cost, which approximates market. 8,495 13,266 Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . 3,046 1,469 ---------- ---------- Total investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,673 107,027 Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 654 3,385 Receivables, net of allowance of $244 and $1,526, respectively . . . . . . 26,594 44,688 Reinsurance recoverable on paid and unpaid losses, net . . . . . . . . . . 25,918 31,546 Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . 25,470 40,039 Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . . . - 763 Property and equipment, net of accumulated depreciation. . . . . . . . . . 7,069 9,890 Deferred securities issuance costs . . . . . . . . . . . . . . . . . . . . 4,204 4,376 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,490 2,418 ---------- ---------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 148,072 $ 244,132 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Liabilities: Loss and loss adjustment expense reserves . . . . . . . . . . . . . . $ 67,204 $ 81,142 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 35,797 59,216 Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . . 17,171 58,226 Distributions payable on preferred securities . . . . . . . . . . . . 49,227 33,203 Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,125 3,625 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 13,827 17,136 Advances from related parties. . . . . . . . . . . . . . . . . . . . . . . 2,687 596 Net liabilities of discontinued operations. . . . . . . . . . . . . . 3,913 - ---------- ---------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,951 253,144 ---------- ---------- Minority interest: Company-obligated mandatorily redeemable preferred stock of trust subsidiary holding solely parent debentures . . . . . . . . . . 135,000 135,000 ---------- ---------- Shareholders' deficit: Common stock, no par value, 100,000,000 shares authorized, and 10,385,399 shares issued and outstanding in both 2002 and 2001. 38,136 38,136 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 5,851 5,851 Unrealized loss on investments available for sale . . . . . . . . . . (2,220) (2,613) Retained deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (220,646) (185,386) ---------- ---------- Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . . . (178,879) (144,012) ---------- ---------- Total liabilities and shareholders' deficit. . . . . . . . . . . . . . . . $ 148,072 $ 244,132 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2002, 2001 and 2000 (In thousands, except per share data) 2002 2001 2000 --------- ---------- --------- Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $107,775 $ 161,092 $174,461 Less ceded premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,291) (105,158) (78,621) --------- ---------- --------- Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,484 $ 55,934 $ 95,840 ========= ========== ========= Net premiums earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,662 $ 76,947 $137,706 Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,341 12,295 14,140 Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,139 6,286 10,074 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,675 874 - Net realized capital loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,807) (1,185) (5,972) --------- ---------- --------- Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,010 95,217 155,948 --------- ---------- --------- Expenses: Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . 48,187 70,441 113,379 Policy acquisition and general and administrative expenses. . . . . . . . . 20,677 40,535 67,538 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 - - Amortization of deferred financing costs, and intangibles and impairment . 171 171 34,977 --------- ---------- --------- Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,246 111,147 215,894 --------- ---------- --------- Loss from continuing operations before income taxes and minority interest. . . . (19,236) (15,930) (59,946) --------- ---------- --------- Income taxes: Current income tax expense (benefit). . . . . . . . . . . . . . . . . . . . - - 487 Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . - - (2,636) --------- ---------- --------- Total income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (2,149) --------- ---------- --------- Loss from continuing operations before minority interest . . . . . . . . . . . . (19,236) (15,930) (57,797) Minority interest: Distributions on preferred securities net of tax of nil in 2002, 2001, and 2000. (16,024) (14,806) (13,587) ---------- --------- -------- Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . (35,260) (30,736) (71,384) Discontinued operations: Loss from operations of discontinued segment, less applicable income taxes Of nil in 2002, 2001, and 2000.. . . . . . . . . . . . . . . . . . . .. . . - - (16,141) Loss on disposal of discontinued segment, less applicable taxes of nil. . . - (2,156) (900) --------- ---------- --------- Loss from discontinued operations. . . . . . . . . . . . . . . . . . .. . . - (2,156) (17,041) --------- ---------- --------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(35,260) $ (32,892) $(88,425) ========= ========== ========= Weighted average shares outstanding - basic and fully diluted. . . . . . . . . . 10,385 10,385 10,385 ========= ========== ========= Net loss from continuing operations per share - basic and fully diluted. . . . . $ (3.40) $ (2.96) $ (6.87) ========= ========== ========= Net loss of discontinued operations per share - basic and fully diluted. . . . . $ - $ (0.21) $ (1.64) --------- ========== ========= Net loss per share - basic and fully diluted . . . . . . . . . . . . . . . . . . $ (3.40) $ (3.17) $ (8.51) ========= ========== =========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) For the years ended December 31, 2002, 2001 and 2000 (In thousands, except number of shares) Unrealized Additional Gain/(Loss) Retained Total Paid-In On Earnings Shareholders' Common Stock Capital Investments (Deficit) Equity ------------ -------- ------------ ---------- ---------- Shares Amount ------------ -------- Balance at January 1, 2000. . . . . 10,385,399 $ 38,136 $ 5,851 $ (4,898) $ (64,069) $ (24,980) ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income: Net loss. . . . . . . . . . . . . . - - - - (88,425) (88,425) Change in unrealized gains (losses) on securities. . . . . . . . . . . - - - 960 - 960 ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income (loss) . . . . - - - 960 (88,425) (87,465) ------------ -------- ------------ ---------- ---------- ---------- Balance at December 31, 2000. . . . 10,385,399 38,136 5,851 (3,938) (152,494) (112,445) ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income: Net loss. . . . . . . . . . . . . . - - - - (32,892) (32,892) Change in unrealized gains (losses) on securities. . . . . . . . . . . - - - 1,325 - 1,325 ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income (loss) . . . . - - - 1,325 (32,892) (31,567) ------------ -------- ------------ ---------- ---------- ---------- Balance at December 31, 2001. . . . 10,385,399 38,136 5,851 (2,613) (185,386) (144,012) ============ ======== ============ ========== ========== ========== Comprehensive income: Net loss. . . . . . . . . . . . . . - - - - (35,260) (35,260) Change in unrealized gains (losses) on securities. . . . . . . . . . . - - - 393 - 393 ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income (loss) . . . . - - - 393 (35,260) (34,867) ------------ -------- ------------ ---------- ---------- ---------- Balance at December 31, 2002. . . . 10,385,399 $ 38,136 $ 5,851 $ (2,220) $(220,646) $(178,879) ============ ======== ============ ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2002, 2001 and 2000 (In thousands) 2002 2001 2000 --------- --------- --------- Cash flows from operating activities Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $(35,260) $(32,892) $(88,425) Adjustments to reconcile net loss to net cash provided by (used in) operations: Depreciation, amortization, impairment and other . .. . . . . . 3,810 2,710 39,305 Deferred income tax expense (benefit). . . . . . . . . . . . . . - - (2,636) Net realized capital loss. . . . . . . . . . . . . .. . . . . . 2,807 1,185 5,972 Net changes in operating assets and liabilities: Receivables. . . . . . . . . . . . . . . . . . . . . . .. . . . . 18,095 5,676 12,163 Reinsurance recoverable on losses, net . . . . . . . . .. . . . . 5,628 16,769 (33,560) Prepaid reinsurance premiums . . . . . . . . . . . . . .. . . . . 14,569 (15,266) (23,691) Deferred policy acquisition costs. . . . . . . . . . . .. . . . . 763 5,691 7,454 Other assets and liabilities . . . . . . . . . . . . . .. . . . . (1,966) 7,445 (6,868) Losses and loss adjustment expenses. . . . . . . . . . .. . . . . (13,938) (26,975) (44,338) Unearned premiums. . . . . . . . . . . . . . . . . . . .. . . . . (23,419) (3,170) (18,176) Reinsurance payables . . . . . . . . . . . . . . . . . .. . . . . (41,055) (3,833) 56,198 Distributions payable on preferred securities. . . . . .. . . . . 16,024 14,806 13,587 Net assets/(liabilities) from discontinued operations. . . . (7,710) 5,888 34,862 --------- --------- --------- Net cash (used in) operations. . . . . . . . . . . . . . . . . . . . (61,652) (21,966) (48,153) --------- --------- --------- Cash flows from investing activities, net of assets acquired: Net sales of short-term investments . . . . . . . . . . . . . 4,770 1,606 6,947 Purchases of fixed maturities. . . . . . . . . . . . . . . . . (28,723) (34,204) (9,937) Proceeds from sales, calls and maturities of fixed maturities. 70,821 60,262 76,947 Purchase of equity securities. . . . . . . . . . . . . . . . . (884) (11,668) (25,195) Proceeds from sales of equity securities . . . . . . . . . . . 5,428 10,820 17,491 Proceeds from repayment of mortgage loans. . . . . . . . . . . - 1,870 120 Purchase of property and equipment . . . . . . . . . . . . . . (681) (1,378) (1,685) Net sales (purchase) of other investments. . . . . . . . . . . 866 (92) (414) Net investing activities from discontinued operations. . . . . 5,663 (4,456) (150) --------- --------- --------- Net cash provided by investing activities . . . . . . . . . . . . . 57,260 22,760 64,124 --------- --------- --------- Cash flow from financing activities, net of assets acquired: Loans from and (repayments to) related parties . . . . . . . . 2,091 1,276 (274) Proceeds from related parties . . . . . . . . . . . . . . . . (2,477) - - Net financing activities from discontinued operations. . . . . 2,047 (48) (16,473) --------- --------- --------- Net cash provided by / (used in) financing activities: . . . . . . . 1,661 1,228 (16,747) --------- --------- --------- Increase (decrease) in cash and cash equivalents . . . . . . . . . . (2,731) 2,022 (776) Cash and cash equivalents, beginning of year . . . . . . . . . . . . 3,385 1,363 2,139 --------- --------- --------- Cash and cash equivalents, end of year . . . . . . . . . . . . . . . $ 654 $ 3,385 $ 1,363 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. ------ SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES ------------------------------------------------------ 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Symons International Group, Inc. (the "Company") is a 73.8% owned subsidiary of Goran Capital Inc. ("Goran"). The Company operates in one segment, the sale of nonstandard automobile insurance. The Company's products are marketed through independent agents and brokers. The Company's active insurance subsidiaries are licensed in 19 states. The following is a description of the significant accounting policies and practices employed: A. BASIS OF PRESENTATION: The consolidated financial statements include the accounts, after intercompany eliminations, of the Company and its wholly-owned subsidiaries as follows: Superior Insurance Group Management, Inc ("Superior Group Management") a holding company for the nonstandard automobile operations which includes: Superior Insurance Group, Inc. ("Superior Group") a management company for the nonstandard automobile operations; Superior Insurance Company ("Superior") an insurance company domiciled in Florida; Superior American Insurance Company ("Superior American") an insurance Company domiciled in Florida; Superior Guaranty Insurance Company ("Superior Guaranty") an insurance Company domiciled in Florida; and Pafco General Insurance Company ("Pafco") an insurance company domiciled in Indiana; IGF Holdings, Inc. ("IGFH") a holding company; and, IGF Insurance Company ("IGF") an insurance company domiciled in Indiana (See Note 19). B. USE OF ESTIMATES: The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. C. SIGNIFICANT ESTIMATES: The most significant estimates in the Company's balance sheet are the determination of prepaid policy acquisition costs, the reserve for insurance losses and loss adjustment expenses. Management's estimate of prepaid policy acquisition costs is based on historical studies and assumptions made regarding costs incurred. Management's estimate of insurance losses and loss adjustment expenses is based on past loss experience and consideration of current claim trends, as well as prevailing social, economic and legal conditions. Actual results could differ from these estimates. D. PREMIUMS: Premiums are recognized as income ratably over the life of the policies and are stated net of ceded premiums. Unearned premiums are computed on the daily pro rata basis. E. INVESTMENTS: Investments are presented on the following basis: Fixed maturities and equity securities are classified as available for sale and are carried at market value with the unrealized gain or loss considered a component of shareholders' equity. Accordingly, any change in the unrealized gain or loss has no effect on net income. Real estate is carried at cost, less an allowance for depreciation. Mortgage loans are carried at outstanding principal balance. Realized gains and losses on the sale of investments are recorded on the trade date and are recognized in net income on the specific identification basis. Interest and dividend income are recognized as earned. F. CASH AND CASH EQUIVALENTS: For presentation in the statement of cash flows, the Company includes in cash and cash equivalents all cash on hand and demand deposits with original maturities of three months or less. G. DEFERRED POLICY ACQUISITION COSTS: Deferred policy acquisition costs are comprised of agents' commissions, premium taxes, certain other costs and investment income that are related directly to the acquisition of new and renewal business, net of expense allowances received in connection with reinsurance ceded, which have been accounted for as a reduction of the related policy acquisition costs. These costs are deferred and amortized over the term of the policies to which they relate. Acquisition costs that exceed estimated losses and loss adjustment expenses and maintenance costs are charged to expense in the period in which the excess costs are determined. H. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation for buildings is based on the straight-line method over 31 years. Other property and equipment is depreciated on the straight-line basis over their estimated useful lives ranging from three to seven years. Asset and accumulated depreciation accounts are relieved for disposals, with resulting gains or losses included in net income. I. INTANGIBLE ASSETS: Intangible assets consist primarily of debt acquisition costs and goodwill, in years 2000 and prior. Deferred debt acquisition costs are amortized over the term of the debt. Prior to 2000, goodwill was amortized over a 25-year period on a straight-line basis based upon management's estimate of the expected benefit period. See Note 5 regarding the goodwill impairment charge recorded in 2000. J. ASSET IMPAIRMENT POLICY: The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. See Note 5 regarding the goodwill impairment charge recorded in 2000. Any long-lived assets held for disposal are reported at the lower of carrying amount or fair value, less expected costs to sell. K. LOSSES AND LOSS ADJUSTMENT EXPENSES: Reserves for losses and loss adjustment expenses include estimates for reported unpaid losses and loss adjustment expenses, including a portion attributable to losses incurred but not reported. These reserves have not been discounted. Reserves are established using individual case-basis evaluations and statistical analysis as claims are reported. Those estimates are subject to the effects of trends in loss severity and frequency. While management believes the reserves make reasonable provisions for unpaid loss and loss adjustment expense obligations, those provisions are necessarily based on estimates and are subject to variability. Changes in the estimated reserves are charged or credited to operations as additional information on the estimated amount of a claim becomes known during the course of its settlement. The gross reserve for losses and loss adjustment expenses is reported net of anticipated receipts for salvage and subrogation of approximately $4,535,000 and $5,822,000 at December 31, 2002 and 2001, respectively. L. PREFERRED SECURITIES: Preferred securities represent Company-obligated mandatorily redeemable securities of a trust subsidiary holding solely parent debentures and are reported at their liquidation value under minority interest. Distributions on these securities are charged against consolidated earnings. M. INCOME TAXES: The Company utilizes the liability method of accounting for deferred income taxes. Under the liability method, companies will establish a deferred tax liability or asset for the future tax effects of temporary differences between book and taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. N. REINSURANCE: Reinsurance premiums, commissions and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. O. EARNINGS PER SHARE: The Company's basic earnings per share calculations are based on the weighted average number of shares of common stock outstanding during each period. As the Company has reported losses in 2002, 2001, and 2000, common stock equivalents are anti-dilutive; therefore, fully diluted earnings per share is the same as basic earnings per share. P. STOCK-BASED COMPENSATION: As discussed further in note 16, the Company accounts for stock-based employee compensation using the intrinsic value method under APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations as permitted under SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148). Accordingly, no compensation expense is recognized if the market price of the underlying stock does not exceed the exercise price at the date of grant. However, SFAS 123, "Accounting for Stock-Based Compensation," (SFAS 123) as amended by SFAS 148 requires the Company to present pro forma information as if it had accounted for its stock-based compensation under the fair value method of SFAS 123. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.
2002 2001 2000 --------- --------- --------- Net loss as reported. . . . . . . . . . . . . . . . . . . $(35,260) $(32,892) $(88,425) Add: Compensation expense for stock-based compensation included in reported net income, net of related tax effects. . . . . . . . . . . . . . . . -- -- -- Deduct: Total stock-based compensation expense determined under fair-value-based method, net of related tax effects. . . . . . . . . . . . . . . . . . . . . . . (143) (204) (284) --------- --------- --------- Pro forma net loss. . . . . . . . . . . . . . . . . . . . $(35,403) $(33,096) $(88,709) Net loss per share: Basic and fully diluted, as reported. . . . . . . . . . . $ (3.40) $ (3.17) $ (8.51) Basic and fully diluted, pro forma. . . . . . . . . . . . $ (3.41) $ (3.19) $ (8.54)
Q. NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board (the "Board") finalized FASB Statements No. 141, Business Combinations, No. 142, Goodwill and Other Intangible Assets, and No. 143, Accounting for Asset Retirement Obligations. In August 2001, the Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. These new standards were effective in 2002 and did not have a material impact on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148) which amends SFAS 123, "Accounting for Stock-Based Compensation" (SFAS 123) to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. The Company has decided to continue to account for stock-based employee compensation using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and interpretations as permitted under SFAS 148. Accordingly, no compensation expense is recorded if the current market price of the underlying stock does not exceed the exercise price at the date of grant. R. RECLASSIFICATIONS: Certain amounts from prior periods have been reclassified to allow for comparability to the 2002 presentation. 2. INVESTMENTS Investments are summarized as follows (in thousands):
Cost or Estimated Amortized Unrealized Unrealized Market December 31, 2002 Cost Gain Loss Value ---------- ----------- ------------ ------- Fixed Maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies. . . . . . $ 17,814 $ 541 $ - $18,355 Mortgage backed securities. . . . . . . . . . . . 4,828 182 (5) 5,005 ---------- ----------- ------------ ------- Total U.S. Treasury and other government obligations. . . . . . . . . . . . . . . . . . 22,642 723 (5) 23,360 Corporate securities. . . . . . . . . . . . . . . 13,043 1,129 (804) 13,368 ---------- ----------- ------------ ------- Total fixed maturities. . . . . . . . . . . . . 35,685 1,852 (809) 36,728 Equity securities . . . . . . . . . . . . . . . . 9,667 126 (3,389) 6,404 Short-term investments. . . . . . . . . . . . . . 8,495 - - 8,495 Other invested assets (including real estate) . . 3,046 - - 3,046 ---------- ----------- ------------ ------- Total investments . . . . . . . . . . . . . . . $ 56,893 $ 1,978 $ (4,198) $54,673 ========== =========== ============ =======
Cost or Estimated Amortized Unrealized Unrealized Market December 31, 2001 Cost Gain Loss Value ---------- ----------- ------------ ------- Fixed Maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies . . . . $ 29,912 $ 609 $ (311) $ 30,210 Mortgage backed securities. . . . . . . . . . . . 17,500 1,928 (47) 19,381 ---------- ----------- ------------ -------- Total U.S. Treasury and other government obligations . . . . . . . . . . . . . . . . . 47,412 2,537 (358) 49,591 Corporate securities. . . . . . . . . . . . . . . 29,528 430 (1,653) 28,305 ---------- ----------- ------------ -------- Total fixed maturities. . . . . . . . . . . . . 76,940 2,967 (2,011) 77,896 Equity securities . . . . . . . . . . . . . . . . 17,965 27 (3,596) 14,396 Short-term investments. . . . . . . . . . . . . . 13,266 - - 13,266 Other invested assets (including real estate) . . 1,469 - - 1,469 ---------- ----------- ------------ -------- Total investments . . . . . . . . . . . . . . . . $ 109,640 $ 2,994 $ (5,607) $107,027 ========== =========== ============ ========
At December 31, 2002, The Standard & Poors Corporation or Moody's Investor Services, Inc. considered 96.4% of the Company's fixed maturities investment grade. Securities with quality ratings, Baa and above are considered investment grade securities. In addition, the Company's investments in fixed maturities did not contain any significant geographic or industry concentration of credit risk. The amortized cost and estimated market value of fixed maturities at December 31, 2002, by contractual maturity, are shown in the table that follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty and securities may have to be liquidated to cover operational losses (in thousands):
Estimated Amortized Cost Market Value --------------- ------------- Due in one year or less. . . . . . . . $ 8,733 $ 8,866 Due after one year through five years. 11,712 12,077 Due after five years through ten years 7,448 7,492 Due after ten years. . . . . . . . . . 2,965 3,288 Mortgage-backed securities . . . . . . 4,828 5,005 --------------- ------------- $ 35,686 $ 36,728 =============== =============
Gains and losses realized on sales of investments are as follows (in thousands):
2002 2001 2000 -------- -------- -------- Proceeds from sales . $76,249 $71,082 $94,558 Gross gains realized. 2,502 481 1,359 Gross losses realized (5,309) (1,666) (7,331)
Net investment income for the years ended December 31 are as follows (in thousands):
2002 2001 2000 ------- ------- -------- Fixed maturities. . . . . . . . $4,221 $5,666 $ 8,795 Equity securities . . . . . . . 145 213 304 Cash and short-term investments 204 469 1,077 Mortgage loans. . . . . . . . . - 65 - Other . . . . . . . . . . . . . - 769 - ------- ------- -------- Total investment income . . . . 4,570 7,182 10,176 Investment expenses . . . . . . (431) (896) (102) ------- ------- -------- Net investment income . . . . . $4,139 $6,286 $10,074 ======= ======= ========
Investments with a market value of $13,126,139 and $13,663,118 (amortized cost of $12,908,173 and $13,348,887) as of December 31, 2002 and 2001, respectively, were on deposit in the United States. The deposits are required by various insurance departments and others to support licensing requirements and certain reinsurance contracts. 3. DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs are capitalized and amortized over the life of the policies. Policy acquisition costs are those costs directly related to the issuance of insurance policies including commissions, premium taxes, and underwriting expenses net of reinsurance commission income on such policies. Policy acquisition costs both acquired and deferred, and the related amortization charged to income were as follows (in thousands):
2002 2001 2000 --------- --------- --------- Balance, beginning of year $ 763 $ 6,454 $ 13,908 Costs deferred during year 18,861 28,056 29,999 Amortization during year . (19,624) (33,747) (37,453) --------- --------- --------- Balance, end of year . . . $ - $ 763 $ 6,454 --------- ========= =========
4. PROPERTY AND EQUIPMENT Property and equipment at December 31 are summarized as follows (in thousands):
Accumulated 2002 Cost Depreciation 2002 Net 2001 Net ----------- ------------ --------- ------- Land . . . . . . . . . . . . . $ 100 $ - $ 100 $ 100 Buildings. . . . . . . . . . . 4,279 1,877 2,402 2,655 Office furniture and equipment 2,108 1,684 424 808 Automobiles. . . . . . . . . . 76 49 27 42 Computer equipment . . . . . . 14,801 10,685 4,116 6,285 ------------- --------- --------- ------ Total. . . . . . . . . . . . . $ 21,364 $ 14,295 $ 7,069 $9,890 ============= ========= ========= ======
Accumulated depreciation at December 31, 2001 was $10,792,000. Depreciation expense related to property and equipment for the years ended December 31, 2002, 2001 and 2000 was $3,658,000, $3,738,000 and $3,498,000, respectively. 5. INTANGIBLE ASSETS In accordance with SFAS No. 121, Accounting for the Impairment of Long-lived Assets, the Company determined in 2000 that the carrying value of goodwill that resulted from the acquisition of Superior Group Management exceeded its fair value. This determination was made considering the series of continued losses which the Company had experienced, the reduction in the volume of premiums written, as well as an evaluation of future cash flows. Based on this assessment, a charge of $33,464,000 was recorded in the fourth quarter of 2000 to write-off the remaining carrying value of the goodwill. Such charge is included as amortization expense in the accompanying financial statements for 2000. Intangible assets at December 31 are as follows (in thousands):
Accumulated 2002 Cost Amortization 2002 Net 2001 Net --------- ------------- --------- ------- Deferred securities issuance costs $ 5,132 $ 928 $ 4,204 $4,376
Accumulated amortization at December 31, 2001 was $755,000. Amortization expense related to intangible assets for the years ended December 31, 2002, 2001 and 2000 was $173,000, $171,000, and $34,977,000 respectively. 6. PREFERRED SECURITIES On August 12, 1997, the Company's trust subsidiary issued $135 million in preferred securities ("Preferred Securities") bearing interest at an annual rate of 9.5%. The principal assets of the trust subsidiary are senior subordinated notes of the Company in the principal amount of $135 million with an interest rate and maturity date substantially identical to those of the Preferred Securities. Expenses of the issue aggregated $5.1 million and are amortized over the term of the Preferred Securities. The Preferred Securities represent Company-obligated mandatorily redeemable securities of a trust subsidiary holding solely parent debentures and have a term of 30 years with semi-annual interest payments commencing February 15, 1998. The Company may redeem the Preferred Securities in whole or in part after 10 years. The annual Preferred Security obligations of approximately $13 million per year were anticipated to be funded from the Company's nonstandard automobile management company from management and billing fees in excess of operating costs. Under the terms of the indenture, the Company is permitted to defer semi-annual interest payments for up to five years. The Company elected to defer the interest payments due in February and August 2000, 2001 and 2002 and February 2003 and expects to continue this practice through 2003 and 2004. All of the deferred interest (approximately $84 million, if all payments due in 2003 and 2004 are deferred) will become due and payable in February 2005. The Company relies on the payment of finance and service fees by its subsidiaries to fund its operations, including its payment of interest on the Preferred Securities. Certain state regulators, including the Florida Department of Insurance ("FDOI"), have issued orders prohibiting the Company's subsidiaries from paying such fees to the Company. In the event such orders continue, the Company may not have sufficient revenue to fund its operations or to pay the deferred interest on the Preferred Securities. Such failure to pay could result in a default under the indenture and acceleration of the payment of the Preferred Securities. The trust indenture for the Preferred Securities contains certain restrictive covenants. These covenants are based upon the Company's consolidated coverage ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA"). If the Company's EBITDA falls below 2.5 times consolidated interest expense (including Preferred Security distributions) for the most recent four quarters the following restrictions become effective: - The Company may not incur additional indebtedness or guarantee additional indebtedness. - The Company may not make certain restricted payments including making loans or advances to affiliates, repurchasing common stock or paying dividends in excess of a stated limitation. - The Company may not increase its level of non-investment grade securities defined as equities, mortgage loans, real estate, real estate loans and non-investment grade fixed income securities. These restrictions currently apply, as the Company's consolidated coverage ratio was (0.95) in 2002, and will continue to apply until the Company's consolidated coverage ratio complies with the terms of the trust indenture. The Company complied with these additional restrictions as of December 31, 2001 and 2002 and is in compliance as of May 9, 2003. 7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows (in thousands):
2002 2001 2000 ------- -------- --------- Balance at January 1. . . . . . $81,142 $108,117 $152,455 Less reinsurance recoverables . 30,600 23,252 13,527 ------- -------- --------- Net balance at January 1 . 50,542 84,865 138,928 ------- -------- --------- Incurred related to current year. . . . . . . . . . 35,413 69,667 127,497 Prior years . . . . . . . . . . 12,775 774 (14,118) ------- -------- --------- Total incurred . . . . . . 48,188 70,441 113,379 ------- -------- --------- Paid related to Current year. . . . . . . . . . 19,211 46,973 85,334 Prior years . . . . . . . . . . 36,374 57,791 82,108 ------- -------- --------- Total paid . . . . . . . . 55,585 104,764 167,442 ------- -------- --------- Net balance at December 31 43,145 50,542 84,865 Plus reinsurance recoverables . 24,059 30,600 23,252 ------- -------- --------- Balance at December 31 . . $67,204 $ 81,142 $108,117 ======= ======== =========
Reserve estimates are regularly adjusted in subsequent reporting periods as new facts and circumstances emerge to indicate that a modification of the prior estimate is necessary. The adjustment, referred to as "reserve development," is inevitable given the complexities of the reserving process and is recorded in the statements of operations in the period when the need for the adjustment becomes known. The foregoing reconciliation indicates unfavorable development of $12,775,000 on the December 31, 2001 reserves. A portion of the 2001 reserve development was caused by a larger than normal number of previously closed claims that reopened in 2002. The remainder of the 2001 reserve development resulted from a higher than expected frequency and severity on nonstandard automobile claims. The anticipated effect of inflation is implicitly considered when estimating losses and loss adjustment expenses liabilities. While anticipated price increases due to inflation are considered in estimating the ultimate claims costs, increases in average claim severities is caused by a number of factors. Future severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, claims management practices and procedures and general economic trends. Anticipated severity trends are monitored relative to actual development and are modified if necessary. Liabilities for loss and loss adjustment expenses have been established when sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, reserves have been established to cover additional exposure on both known and unasserted claims. 8. INCOME TAXES The Company files a consolidated federal income tax return with its wholly-owned subsidiaries. Intercompany tax sharing agreements between the Company and its wholly-owned subsidiaries provide that income taxes will be allocated based upon separate return calculations in accordance with the Internal Revenue Code of 1986, as amended. A reconciliation of the differences between federal tax computed by applying the federal statutory rate of 35% to income before income taxes and the income tax provision is as follows (in thousands):
2002 2001 2000 -------- -------- --------- Computed income taxes (benefit) at statutory rate $(6,732) $(5,576) $(20,981) Goodwill. . . . . . . . . . . . . . . . . . . . . - - 12,176 Distribution in excess of basis . . . . . . . . . 637 - - Other . . . . . . . . . . . . . . . . . . . . . . 73 32 (4,042) -------- -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . (6,022) (5,544) (12,847) Valuation allowance . . . . . . . . . . . . . . . 6,022 5,544 10,698 -------- -------- --------- Income tax expense. . . . . . . . . . . . . . . . $ - $ - $ (2,149) ======== ======== =========
The net deferred tax asset at December 31, 2002 and 2001 is comprised of the following (in thousands):
2002 2001 --------- --------- Deferred tax assets: Unpaid losses and loss adjustment expenses $ 1,112 $ 1,300 Unearned premiums. . . . . . . . . . . . . 656 1,159 Allowance for doubtful accounts. . . . . . 190 629 Unrealized losses on investments . . . . . 777 914 Net operating loss carryforwards . . . . . 13,344 18,279 Capital loss carryforwards . . . . . . . . 4,055 2,107 Accrued interest payable . . . . . . . . . 17,230 11,621 Other. . . . . . . . . . . . . . . . . . . 1,806 1,452 --------- --------- Deferred tax assets . . . . . . . . . . 39,170 37,461 --------- --------- Deferred tax liabilities: Deferred policy acquisition costs. . . . . 713 (168) Other. . . . . . . . . . . . . . . . . . . (877) (924) --------- --------- Valuation allowance . . . . . . . . . . (39,006) (36,369) --------- --------- Net deferred tax assets . . . . . . . . $ - $ - ========= =========
At December 31, 2002 and 2001, the Company's net deferred tax assets were fully offset by a valuation allowance. As of December 31, 2002, the Company has unused net operating loss carryovers available as follows (in thousands):
Year of expiration: 2019. . . . . . . . $21,030 2020. . . . . . . . 17,095 ------- Total . . . . $38,125 =======
Federal income tax filings of the Company for years prior to 2000 have been examined by the Internal Revenue Service. 9. LEASES The Company leases buildings, furniture, cars and equipment under operating leases. Operating leases generally include renewal options for periods ranging from two to seven years and require the Company to pay utilities, taxes, insurance and maintenance expenses. The following is a schedule of future minimum lease payments under cancelable and non-cancelable operating leases for each of the five years succeeding December 31, 2002 and thereafter, excluding renewal options (in thousands):
Years Ending December 31: 2003. . . . . . . . . . . $617 2004. . . . . . . . . . . 438 2005. . . . . . . . . . . 338 2006. . . . . . . . . . . 117 2007 and Thereafter . . . 83
Rental expense charged to operations in 2002, 2001 and 2000 amounted to $1,009,516, $1,688,000 and $1,848,000, respectively, including amounts paid under short-term cancelable leases. 10. REINSURANCE The Company limits the maximum net loss that can arise from a large risk, or risks in concentrated areas of exposure, by reinsuring (ceding) certain levels of risks with other insurers or reinsurers, either on an automatic basis under general reinsurance contracts known as "treaties" or by negotiation on substantial individual risks. Such reinsurance includes quota share, excess of loss, stop-loss and other forms of reinsurance on essentially all property and casualty lines of insurance. The Company remains contingently liable with respect to reinsurance ceded, which would become an ultimate liability of the Company in the event that such reinsuring companies might be unable, at some later date, to meet their obligations under the reinsurance agreements. In addition, the Company assumes reinsurance on certain risk. Approximately 88.3% of uncollateralized amounts recoverable are with companies which maintain an A.M. Best rating of at least A+. Another 2.7% of recoverable amounts are with Granite Reinsurance Company Ltd. ("Granite Re"), an affiliated foreign corporation which has not applied for an A.M. Best rating, related primarily to commercial business which is ceded 100% to Granite Re, which are fully collateralized. Company management believes amounts recoverable from reinsurers are collectible. Superior commuted the accident year 2001 and 2000 portion of the reinsurance treaty with National Union Fire Insurance Company ("National"). Superior recognized the amounts received from National as a reduction of losses and loss adjustments expenses paid (thereby increasing losses and loss adjustment expenses incurred) to recognize the effect of releasing National from its obligations under the treaty. There was no effect on premiums earned, losses incurred, loss adjustment expense incurred or commission in the current year income statement due to this commutation. The Company sold 100% of its 2001 crop year business to Acceptance Insurance Companies Inc. ("Acceptance"), effective June 6, 2001. The agreements are without recourse as they relate to the net profit or loss on the 2001 crop year book of business. The sale was approved by the Indiana Department of Insurance. Reinsurance activity for 2002, 2001 and 2000, which includes reinsurance with related parties, is summarized as follows (in thousands):
2002 Direct Assumed Ceded Net -------- ------ ------- ------ Premiums written $107,708 $67 $(77,291) $30,484 Premiums earned 129,370 212 (91,920) 37,662 Incurred losses and loss adjustment expenses 114,056 147 (66,016) 48,187 Commission expenses (income) 11,038 (1) (24,656) (13,619) 2001 Direct Assumed Ceded Net ---- -------- ------- ------ ------- Premiums written $159,821 $1,271 $(105,158) $ 55,934 Premiums earned 163,828 2,484 (89,365) 76,947 Incurred losses and loss adjustment expenses 132,589 2,616 (64,764) 70,441 Commission expenses (income) 18,979 151 (25,716) (6,586) 2000 Direct Assumed Ceded Net ---- ------- ------- ----- ----- Premiums written $168,626 $5,835 $ (78,621) $ 95,840 Premiums earned 187,720 4,918 (54,932) 137,706 Incurred losses and loss adjustment expenses 144,987 4,828 (36,436) 113,379 Commission expenses (income) 21,234 1,041 (14,043) 8,232
Amounts recoverable from reinsurers relating to unpaid losses and loss adjustment expenses were $24,060,000 and $30,181,000 as of December 31, 2002 and 2001, respectively. These amounts are reported as assets and are not netted against the liability for loss and loss adjustment expenses in the accompanying Consolidated Balance Sheets. 11. RELATED PARTIES The Company and its subsidiaries have entered into transactions with various related parties including transactions with Goran and its affiliates, Granite Insurance Company ("Granite") and Granite Re. The following balances were outstanding at December 31 (in thousands):
2002 2001 -------- ------ Due from directors and officers . . . . . . . . . . . . . $ 44 $ 42 Other receivables from and (payables to) related parties. (2,731) (638) -------- ------ Total receivables (payables). . . . . . . . . . . . . . . $(2,687) $(596) ======== ====== Reinsurance payable to affiliates . . . . . . . . . . . . $ 502 $ 617 ======== ======
The following transactions occurred with related parties in the years ended December 31 (in thousands):
2002 2001 2000 ------ ------ -------- Reinsurance under various treaties, net: Ceded premiums earned. . . . . . . . . . . . . . . $ 0 $ 3 $ 186 Ceded losses and loss adjustment expenses incurred (85) (419) (4,858) Ceded commissions. . . . . . . . . . . . . . . . . 0 1 (1) Consulting fees charged by various related parties 48 16 1,895
The amounts due from officers and directors are non-interest-bearing loans. The Company paid $1,846,000 in 2000 for consulting and other services to a vendor owned in part by the brother of the Company's president. The consulting and other services were for the conversion of the Company's nonstandard automobile operating system. The Company has capitalized these costs as part of its nonstandard automobile operating system. Approximately 90% of these payments are for services provided by consultants and vendors unrelated to the Company. Superior Group obtained a line of credit from Granite Re in the amount of $2.5 million and $1 million in December 31, 2001 and October 2002, respectively. At December 31, 2002, $2.98 million was outstanding under the line. These line of credit notes bear interest at the rate of prime plus 5.25% for a total of 9.5% at December 31, 2002. Interest only payments are due monthly. The $2.5 million outstanding is due December 20, 2004 and $480 thousand is due November 30, 2004. 12. REGULATORY MATTERS Two of the Company's insurance company subsidiaries, Pafco and IGF, are domiciled in Indiana and prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the IDOI. While neither Pafco nor IGF has surplus from which to pay dividends, statutory requirements place limitations on the amount of funds that can be remitted to the Company from Pafco and IGF. The Indiana statute allows 10% of surplus in regard to policyholders or 100% of net income, whichever is greater, to be paid as dividends only from earned surplus; however, the consent orders with the IDOI, described below, prohibit the payment of any dividends by Pafco and IGF. Another insurance company subsidiary, Superior, and Superior's insurance company subsidiaries, Superior American and Superior Guaranty, are domiciled in Florida and prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the FDOI. The Florida statute also contains limitations with regard to the payment of dividends. Superior, Superior American and Superior Guaranty may pay dividends of up to 10% of surplus or 100% of net income, whichever is greater, from earned surplus. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. On June 6, 2001, IGF sold substantially all of its crop insurance assets to Acceptance. On June 29, 2001, following the sale of IGF's crop insurance assets and as a result of losses experienced by IGF in its crop insurance operations, the IDOI and IGF entered into a consent order (the "Consent Order") relating to IGF. IGF has discontinued writing new business and its operations are presently in run off. The IDOI has continued to monitor the status of IGF. The Consent Order prohibits IGF from taking any of the following actions without prior written consent of the IDOI: - Sell or encumber any of its assets, property, or business in force; - Disburse funds, except to pay direct unaffiliated policyholder claims and normal operating expenses in the ordinary course of business (which does not include payments to affiliates except for the reimbursement of costs for running IGF by the Company, and does not include payments in excess of $10,000); - Lend its funds or make investments, except in specified types of investments; - Incur debts or obligations, except in the ordinary course of business to unaffiliated parties; - Merge or consolidate with another company; - Enter into new, or amend existing, reinsurance agreements; - Complete, enter into or amend any transaction or arrangement with an affiliate, and - Disburse funds or assets to any affiliate. The Consent Order also requires IGF to provide the IDOI with monthly written updates and immediate notice of any material change regarding the status of litigation with Continental Casualty Company, statutory reserves, number of non-standard automobile insurance policies in-force by state, and reports of all non-claims related disbursements. IGF's failure to comply with the Consent Order could cause the IDOI to begin proceedings to have a rehabilitator or liquidator appointed for IGF or to extend the provisions of the Consent Order. Pafco has been subject to an agreed to order of the IDOI since February 17, 2000 that requires Pafco, among other matters, to: - Refrain from doing any of the following without the IDOI's prior written consent: - Selling assets or business in force or transferring property, except in the ordinary course of business; - Disbursing funds, other than for specified purposes or for normal operating expenses and in the ordinary course of business (which does not include payments to affiliates, other than under written contracts previously approved by the IDOI, and does not include payments in excess of $10,000); - Lending funds; - Making investments, except in specified types of investments; - Incurring debt, except in the ordinary course of business and to unaffiliated parties; - Merging or consolidating with another company; or - Entering into new or modifying existing, reinsurance contracts. - Reduce its monthly auto premium writings, or obtain additional statutory capital or surplus, such that the ratio of gross written premium to surplus and net written premium to surplus does not exceed 4.0 and 2.4, respectively; and provide the IDOI with regular reports demonstrating compliance with these monthly writings limitations. - Continue to comply with prior IDOI agreements and orders to correct business practices under which Pafco must provide monthly financial statements to the IDOI, obtain prior IDOI approval of reinsurance arrangements and affiliated party transactions, submit business plans to the IDOI that address levels of surplus and net premiums written, and consult with the IDOI on a monthly basis. Pafco's inability or failure to comply with any of the above conditions could result in the IDOI requiring further reductions in Pafco's permitted premium writings or in the IDOI instituting future proceedings against Pafco. Restrictions on premium writings result in lower premium volume. Management fees payable to Superior Group are based on gross written premium; therefore, lower premium volume results in reduced management fees paid by Pafco to Superior Group. In March 2000, Pafco agreed with the Iowa Department of Insurance ("IADOI") that it would not write any new non-standard business in Iowa, until such time as Pafco has reduced its overall non-standard automobile policy counts in the state or has: - Increased surplus, or - Has achieved a net written premium to surplus ratio of less than three to one, or - Has surplus reasonable to its risk. Pafco has continued to service existing policyholders and renew policies in Iowa and provide policy count information on a monthly basis in conformance with IADOI requirements. Superior and Pafco provide monthly financial information to the departments of insurance in certain states in which they write business at the states' request. On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the "Notice") which principally addressed certain policy and finance fee payments by Superior to Superior Group. A formal administrative hearing to review the Notice and a determination that the order contemplated by the Notice not be issued was held in February 2001. The administrative law judge entered a recommended order on June 1, 2001 that was acceptable to the Company. On August 30, 2001, the FDOI rejected the recommended order and issued its final order which the Company believes improperly characterized billing and policy fees paid by Superior to Superior Group. On September 28, 2001, Superior filed an appeal of the final order to the Florida District Court of Appeal. On March 4, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida seeking court enforcement of the FDOI's final order. Superior filed a motion with the FDOI for stay of the FDOI's final order. Superior also filed a motion for stay with the District Court of Appeal, which was denied pending a ruling from the FDOI. On April 5, 2002 the FDOI granted a stay of the final order that was conditional upon the cessation of the payment of billing fees by Superior to Superior Group and the posting of a $15 million appeal bond. Superior did not agree to the conditions imposed by the FDOI's conditional stay. On May 6, 2002 Superior filed a motion with the District Court of Appeal seeking a stay of the final order pending Superior's appeal or, in the alternative, a consolidation of the FDOI's enforcement action with the pending appeal. On June 19, 2002, the District Court of Appeal entered an order which struck the FDOI's conditional requirement for the stay that Superior post a $15 million appeal bond. However, the order denied Superior's request to consolidate the appeal with the enforcement action. On September 26, 2002, the District Court of Appeal affirmed the final order of the FDOI. On October 31, 2002 the Circuit Court entered a final order which granted the FDOI's petition for enforcement of the FDOI's final order and which requires Superior to comply with the FDOI final order. In accordance with the FDOI's final order, Superior ceased payment of finance and service fees as of October 1, 2002 and has requested repayment from Superior Group of $15 million of finance and service fees paid from 1997 through 1999 and additional finance and service fees paid thereafter in the approximate amount of $20 million. Without the payment of finance and service fee income to Superior Group or an amendment to the management agreement or reallocation of operational responsibilities, Superior Group could not operate profitably. Accordingly, on October 1, 2002, Superior Group discontinued the provision of certain claims services to Superior. Superior is currently exchanging proposals with the FDOI to establish an acceptable repayment plan in accordance with the final order. On September 10, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida for an order to show cause and notice of automatic stay which sought the appointment of a receiver for the purpose of rehabilitation of Superior. The court entered an order to show cause, temporary injunction and notice of automatic stay on September 13, 2002 and a hearing was held on October 24, 2002. On November 1, 2002, the court entered an order that denied the FDOI's petition for appointment of a receiver. On November 8, 2002, the FDOI filed a motion for rehearing, which was denied on December 17, 2002. On November 20, 2002, the FDOI issued a notice and order to show cause which seeks to suspend or revoke Superior's certificate of authority principally based upon allegations that Superior did not comply with the FDOI's August 30, 2001 final order during the pendency of the appeal of the order to the District Court of Appeal. Superior believes that it has fully and timely complied with the final order and that the action brought by the FDOI is barred by res judicata. A formal administrative hearing to review the notice and a determination that the order or administrative action contemplated by the notice not be issued was held in May 2003. The administrative law judge has not yet issued a recommended order, which the FDOI may accept or reject. On March 21, 2003, the FDOI filed a Motion for Enforcement of Final Order Granting Petition to Enforce Agency Action (the "Motion for Enforcement") in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida which sought to hold Superior in contempt for failure to comply with the FDOI's final order during the pendency of Superior's appeal to the Florida District Court of Appeal. On May 7, 2003 a hearing was held on the Motion for Enforcement and an order has not yet been issued. On October 9, 2001, the State Corporation Commission of Virginia ("Virginia Commission") issued an order to take notice regarding an order suspending Superior's license to write business in that state. An administrative hearing for a determination that the suspension order not be issued was held March 5, 2002. On May 3, 2002, the hearing examiner issued his report and recommended that Superior's license not be suspended and that Superior file its risk based capital plans and monthly and quarterly financial information with the Virginia Bureau of Insurance ("Bureau"). On June 19, 2002 the Virginia Commission entered an order which adopted the findings of the hearing examiner, continued the matter until such time as the Bureau requests further action and requires the continued monitoring of the financial condition of Superior by the Bureau. On October 11, 2002, the Virginia Commission filed an administrative Rule to Show Cause. A hearing was scheduled for November 18, 2002 to determine whether Superior's license to transact insurance business in Virginia should be suspended. Because of Superior's improved financial condition, the Virginia Commission continued the hearing indefinitely. The nonstandard automobile insurance policies written in Virginia by Superior accounted for approximately 13.1% and 14.5% of the total gross written premiums of the Company in 2001 and in 2002, respectively. The Company's operating subsidiaries, their business operations, and their transactions with affiliates, including the Company, are subject to regulation and oversight by the IDOI, the FDOI, and the insurance regulators of other states in which the subsidiaries write business. The Company is a holding company and all of its operations are conducted by its subsidiaries. Regulation and oversight of insurance companies and their transactions with affiliates is conducted by state insurance regulators primarily for the protection of policyholders and not for the protection of other creditors or of shareholders. Failure to resolve issues with the IDOI and the FDOI or other state insurance regulators in a mutually satisfactory manner could result in future regulatory actions or proceedings that materially and adversely affect the Company. Risk-Based Capital Requirements In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement risk-based capital ("RBC") requirements for property and casualty insurance companies designed to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations, Indiana and Florida have substantially adopted the NAIC model law and Indiana directly, and Florida indirectly, have adopted the NAIC model Formula. The RBC formula for property and casualty insurers: (i ) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; (iii) declines in asset values arising from investment risks; (iv) off-balance sheet risk arising from adverse experience from non-controlled asset, guarantees for affiliates, contingent liabilities and reserve and premium growth. Pursuant to the model law, insurers having less statutory surplus that that required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC model law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of surplus to RBC decreases. The first level, the Company Action Level (as defined by the NAIC), requires and insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. The Regulatory action level re quires an insurer to submit a plan containing corrective actions and requires the relevant insurance commissioner to perform and examination or other analysis and issue a corrective order if surplus falls below 150% of the RBC amount. The Authorized Control Level gives the relevant insurance commissioner the option either to take the aforementioned actions or to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount. At the time of filing of the unaudited annual statutory financial statements of the Company's insurance subsidiaries with the IDOI and the FDOI for the year ended December 31, 2002, the RBC calculations for Pafco and Superior were in excess of 200% of the RBC amount, a level which requires no corrective action. The RBC calculation for IGF as of December 31, 2002 was in excess of 100% of the RBC amount, which is above the authorized control level. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's independent auditor, reserves for losses and loss adjustment expenses for Superior and Pafco were increased as of December 31, 2002. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets of Superior, investments in Superior American and Superior Guaranty, were recorded in the 2002 audited statutory financial statement filed for Superior and Pafco with the FDOI and the IDOI, respectively. Based on the adjusted audited statutory financial statements, the surplus for Superior fell below 70% of the RBC amount and the surplus level for Pafco was above 150% of the RBC amount as of December 31, 2002. As a result, there may be additional regulatory actions taken by the insurance regulators in states in which the companies write business. The NAIC Insurance Regulatory Information System ("IRIS") was developed primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. IRIS ratios consist of twelve ratios with defined acceptable ranges. They are used as an initial screening process for identifying companies that may be in need of special attention. Companies that have several ratios that fall outside of the acceptable range are selected for closer review by the NAIC. If the NAIC determines that more attention may be warranted, one of five priority designations is assigned and the insurance department of the state of domicile is then responsible for follow-up action. Based on the December 31, 2002 statutory financials filed with the NAIC, Pafco had values outside of the acceptable ranges for five IRIS tests. These included the two-year overall operating ratio, the investment yield ratio, the change in surplus ratio, the liabilities and liquid assets ratio, and the estimated current reserve deficiency to policyholders' surplus ratio. Based on the December 31, 2002 statutory financials filed with the NAIC, Superior had values outside of the acceptable ranges for six IRIS tests. These included the surplus aid to policyholders' surplus ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, the one-year reserve development to policyholders' surplus ratio, and the two-year reserve development to policyholders' surplus ratio. As of December 31, 2002, IGF had values outside of the acceptable ranges for five IRIS tests. These included the change in net writings ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, and the agent's balances to policyholders' surplus ratio. 13. COMMITMENTS AND CONTINGENCIES Superior Guaranty is a defendant in a case filed on November 26, 1996, in the Circuit Court for Lee County, Florida entitled Raed Awad v. Superior Guaranty Insurance Company, et al., Case No. 96-9151 CA LG. The case purported to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The plaintiffs alleged that Superior Guaranty charged premium finance service charges in violation of Florida law. The parties have reached a class settlement which has been approved by the court that is not expected to be material to Superior Guaranty. As previously reported, IGF, which is a wholly owned subsidiary of the Company, had been a party to a number of pending legal proceedings and claims relating to agricultural production interruption insurance policies (the "AgPI Program") which were sold during 1998. All of the policies of insurance which were issued in the AgPI Program were issued by and under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota corporation with its principal place of business located in Arden Hills, Minnesota. Sales of this product resulted in large underwriting losses by IGF. Approximately $29 million was paid through December 31, 2002 in settlement of legal proceedings and policyholder claims related to the AgPI Program. All AgPI policyholder claims were settled during 2000. However, on January 12, 2001 a case was filed in the Superior Court of California, County of Fresno, entitled S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo & Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by four AgPI policyholders who had previously settled their AgPI claims pursuant to binding settlement agreements who now seek additional compensation by asserting through litigation that IGF and the third party carrier paid less than the policy limits they were promised when they purchased the policy and that each settling policyholder was forced to accept the lesser amount due to their economic duress - a legal theory recognized in California if certain elements can be established. The plaintiff's amended their complaint four times during 2002. A demurrer to the fourth amended complaint was filed by MSI and a motion to strike was filed by IGF, which were denied. IGF filed a motion for summary judgment to dismiss the claims in the plaintiff's fourth amended complaint on the basis that releases previously executed by the plaintiffs are binding. The court granted the motion for summary judgment. The cross claims between the selling brokers and MSI and IGF remain pending. The trial is scheduled to begin in August 2003. Superior Guaranty is a defendant in a case filed on October 8, 1999, in the Circuit Court for Manatee County, Florida entitled Patricia Simmons v. Superior Guaranty Insurance Company, Case No. 1999 CA-4635. The case purported to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The Plaintiff alleged that the defendant charged interest in violation of Florida law. The parties have settled the case in an amount that is not material to the Company's financial condition. The Company is a defendant in a case filed on February 23, 2000, in the United States District Court for the Southern District of Indiana entitled Robert Winn, et al. v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S. Other parties named as defendants are Goran, three individuals who were or are officers or directors of the Company or of Goran, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a class consisting of purchasers of the Company's stock or Goran's stock during the period February 27, 1998, through and including November 18, 1999. Plaintiffs allege, among other things, that defendants misrepresented the reliability of the Company's reported financial statements, data processing and financial reporting systems, internal controls and loss reserves in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule 10b-5 promulgated thereunder. The individual defendants are also alleged to be liable as "controlling persons" under Sec.20 (a) of the 1934 Act. As previously reported in the Company's September 30, 2002 Form 10-Q, the Company, Goran and the individual defendants entered into an agreement with the plaintiffs for settlement. The settlement is subject to certain terms and conditions and court approval. As previously reported, the Company and two of its subsidiaries, IGFH and IGF, were parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the "SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired certain crop insurance operations of CNA. The obligations of the Company, IGFH, IGF and CNA under the SAA are the subject of an action filed on June 4, 2001 and pending in United States District Court for the Southern District of Indiana, Indianapolis Division. Claims have also been asserted in the action against Goran, Granite Re, Pafco, Superior and certain members of the Symons family. Discovery is proceeding. Although the Company continues to believe that it has claims against CNA and defenses to CNA's claims which may offset or reduce amounts owing by the Company or its affiliates to CNA, there can be no assurance that the ultimate resolution of the claims asserted by CNA against the Company and its affiliates will not have a material adverse effect upon the Company's and its affiliates' financial condition or results of operations. Superior was a defendant in a case filed on May 8, 2001 in the United States District Court Southern District of Florida entitled The Chiropractic Centre, Inc. v. Superior Insurance Company, Case No. 01-6782. The case purported to be brought on behalf of a class consisting of healthcare providers improperly paid discounted rates on services to patients based upon a preferred provider contract with a third party. The plaintiff alleged that Superior breached a third party beneficiary contract, committed fraud and engaged in racketeering activity in violation of federal and Florida law by obtaining discounted rates offered by a third party with whom the plaintiff contracted directly. On September 30, 2002, the court issued an administrative order which dismissed the case. The court's order administratively closing the case could be temporary or permanent. Superior believes that the allegations of wrongdoing as alleged in the complaint were without merit and in the event the order is temporary, Superior intends to vigorously defend the claims brought against it. IGF is a defendant in a case filed on December 31, 2002 in the Circuit Court of Greene County, Missouri entitled Kevin L. Stevens v. Wilkerson Insurers, et al., Case No. 102CC5135. Other parties named as defendants are Goran, Goran's subsidiaries, Symons International Group (Florida), Inc. and Granite Re, Superior Group Management, Superior, Superior American, Superior Guaranty, Pafco and three individuals who were or are officers or directors of the Company. Motions to dismiss Goran, Symons International Group (Florida), Inc., Granite Re, Superior Group Management, Superior, Superior American, Superior Guaranty and certain named individuals for lack of personal jurisdiction are pending. The case purports to be brought on behalf of an IGF insured seeking to recover alleged damages based on allegations of bad faith, negligent claims handling and breach of fiduciary duties with respect to a claim which arose from an accident caused by the IGF insured. IGF believes that the allegations of wrongdoing as alleged in the complaint are without merit and intends to vigorously defend the claims brought against it. See Note 12 to the Consolidated Financial Statements, Regulatory Matters, for additional contingencies involving insurance regulatory matters. The Company and its subsidiaries are named as defendants in various other lawsuits relating to their business and arising in the ordinary course of business. Legal actions arise from claims made under insurance policies issued by the Company's subsidiaries. The Company, through its claims reserves, reserves for both the amount of estimated damages attributable to these lawsuits and the estimate costs of litigation. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. 14. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid/(received) for income taxes and interest is summarized as follows (in thousands):
2002 2001 2000 ----- ----- -------- Cash paid/(received) for federal income taxes, net of refunds $ - $ - $(6,134) ===== ===== ======== Cash paid for interest. . . . . . . . . . . . . . . . . . . . $ 211 $ - $ - ===== ===== ========
15. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS The following discussion outlines the methodologies and assumptions used to determine the estimated fair value of the Company's financial instruments. Considerable judgment is required to develop these fair values and, accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of the Company's financial instruments. a) FIXED MATURITY, EQUITY SECURITIES AND OTHER INVESTMENTS: Fair values for fixed maturity and equity securities are based on quote market prices. b) SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS: The carrying value for assets classified as short-term investments and cash and cash equivalents in the accompanying Consolidated Balance Sheets approximates their fair value. c) SHORT-TERM DEBT: The carrying value for short-term debt approximates fair value. d) PREFERRED SECURITIES: There is not an active market for the Preferred Securities; however, the estimated market value as of December 31, 2002 was approximately $9,000,000. 16. STOCK OPTION PLANS On November 1, 1996, the Company adopted the Symons International Group, Inc. 1996 Stock Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan provides the Company authority to grant nonqualified stock options and incentive stock options to officers and key employees of the Company and its subsidiaries and nonqualified stock options to non-employee directors of the Company and Goran. Options have been granted at an exercise price equal to the fair market value of the Company's stock at date of grant. All of the outstanding stock options vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. Information regarding the SIG Stock Option Plan is summarized below:
2002 2001 2000 Weighted Weighted Weighted Average Average Average 2002 Exercise 2001 Exercise 2000 Exercise Shares Price Shares Price Shares Price ---------- ------- ---------- ------- ---------- ------- Outstanding at the beginning of the year . . . . . . . . . . . 1,271,333 $0.8283 1,344,833 $0.9400 213,033 $6.3125 Granted . . . . . . . . . . . . - - - - 1,287,000 0.5436 Exercised . . . . . . . . . . . - - - - - - Forfeited/Surrendered . . . . . (386,333) 1.4650 (73,500) 2.8474 (155,200) 5.0391 ---------- ---------- ---------- Outstanding at the end of the Year . . . . . . . . . . . . . 885,000 0.5503 1,271,333 0.8283 1,344,833 0.9400 ========== ========== ========== Options exercisable at year end 590,167 0.5520 465,333 1.3180 73,500 6.3125 Available for future grant. . . 615,000 - 228,667 - 155,167 -
Options Options Weighted Outstanding Exercisable Average Weighted Weighted Remaining Average Average Number Life (in Exercise Number Exercise Range of Exercise Prices Outstanding Years) Price Exercisable Price ------------------------- ----------- ------------ --------- ---------- -------- 0.50 - $0.8750 . . . . . 884,500 7.4 $ 0.5477 763,000 $ 0.5477 6.3125 . . . . . . . . . 500 5.5 6.3125 500 6.3125 ----------- ----------- 885,000 763,500 ========== ===========
The Board of Directors of Superior Group Management (formally, GGS Management Holdings, Inc.) adopted the GGS Management Holdings, Inc. Stock Option Plan (the "Superior Group Management Stock Option Plan"), effective April 30, 1996. The Superior Group Management Stock Option Plan authorizes the granting of nonqualified and incentive stock options to such officers and other key employees as may be designated by the Board of Directors of Superior Group Management. Options granted under the Superior Group Management Stock Option Plan have a term of ten years and vest at a rate of 20% per year for the five years after the date of the grant. The exercise price of any options granted under the Superior Group Management Stock Option Plan is subject to the following formula: 50% of each grant of options having an exercise price determined by the Board of Directors of Superior Group Management at its discretion, with the remaining 50% of each grant of options subject to a compound annual increase in the exercise price of 10%, with a limitation on the exercise price escalation as such options vest. Information regarding the Superior Group Management Stock Option Plan is summarized below:
2002 2001 2000 Weighted Weighted Weighted Average Average Average 2002 Exercise 2001 Exercise 2000 Exercise Shares Price Shares Price Shares Price -------- ------ ------- ------ ------- ------ Outstanding at the beginning of the year. . . . . . . . . . 83,332 $57.65 83,432 $54.42 92,232 $51.75 Granted . . . . . . . . . . . . - - - - - - Forfeited . . . . . . . . . . . (55,555) 57.65 (100) 57.65 (8,800) 51.48 -------- ------ ------- ------- Outstanding at the end of the year . . . . . . . . . . . . . 27,777 57.65 83,332 57.65 83,432 54.42 ======== ======= ======= Options exercisable at year end 27,777 57.65 83,332 57.65 66,726 54.42 Available for future grant. . . 83,334 - 27,779 - 27,679 -
Options Options Outstanding Exercisable Weighted Weighted Weighted Average Average Average Number Remaining Exercise Number Exercise Range of Exercise Prices Outstanding Life (in years) Price Exercisable Price ------------------------- ------------ -------------- ------- ---------- ----- 44.17. . . . . . . . . . 13,889 3.1 yrs $ 44.17 13,889 $ 44.17 71.14. . . . . . . . . . 13,888 3.1 yrs $ 71.14 13,888 $ 71.14
The Company accounts for stock-based employee compensation using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees" and interpretation as permitted under SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure'' (SFAS 148). Accordingly, no compensation cost is recorded if the current market price of the underlying stock does not exceed the exercise price at the date of grant. See Note 1 for a pro forma disclosure of the effect stock-based compensation would have had on net loss and net loss per share had the Company applied the fair value accounting provisions of SFAS 123 to stock-based employee compensation and non-employee director compensation. For purposes of applying SFAS 123, the fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
SIG SIG SIG 2002 Grants 2001 Grants 2000 Grants ----------- ------------- ----------- Risk-free interest rates. . . . . . . N/A N/A 5% Dividend yields . . . . . . . . . . . N/A N/A - Volatility factors. . . . . . . . . . N/A N/A 106% Weighted average expected life. . . . N/A N/A 4.0 Years Weighted average fair value per share N/A N/A $ 0.40
17. MANAGEMENT'S PLANS The Company reported net losses of $(35.3) million and $(32.9) million for the years 2002 and 2001, respectively, and is a party to a number of legal proceedings and claims. While shareholders' equity at December 31, 2002 is a deficit of approximately $(179) million, the Company has partially offsetting thirty-year mandatorily redeemable trust preferred stock outstanding of $135 million, which are not due for redemption until 2027. Accumulated interest of approximately $84 million will be due in February 2005. The insurance subsidiaries, excluding IGF, have statutory surplus of approximately $30 million. Management has initiated substantial changes in operational procedures in an effort to return the Company to profitable levels and to improve its financial condition. The Company has and is continuing to raise its rates in a market environment where increasing rates and withdrawal from the market by other companies show positive trends for improving profitability of nonstandard automobile insurance underwriters. During January and February 2002, the Company sustained adverse loss experience on a substantial portion of its new business written in certain markets. In late February and early March 2002, the Company commenced further analysis of loss ratios by individual agency and a review of claim settlement procedures. Based on this and other analysis, the Company took a number of actions to improve the financial position and operating results of the Company including: - Eliminated reinstatements in all markets, i.e., upon policy cancellation, the insured must obtain a new policy at prevailing rates and underwriting guidelines; - Terminated or placed on new business moratorium several hundred agents whose loss ratios were abnormally high when compared to the average for the remaining agents (these agents accounted for approximately 16% of the total gross written premium in 2001); - Increased underwriting requirements in certain markets including: higher down payments, new policy fees, and shorter policy terms; - Hired a consultant with significant auto claims experience to review processes and suggest modifications to the claims function. The above actions were followed by: - Replacement of the president of the non-standard automobile business; - Hiring an experienced vice president of claims; - Consolidation of all underwriting activities, premium accounting, and agency licensing to the Indianapolis, IN office from Atlanta, GA; - Closing of regional offices in Denver, CO; Virginia Beach and Alexandria, VA; Glendale, CA; and Jacksonville, FL; - Replacement of the claims department national litigation manager; - Replacement of the marketing manager and the product manager; - Heavy focus on the improvement of process and customer service; and - Continued transition to an improved policy processing system. These actions have resulted in improved operations and a lower expense ratio. Employee staffing levels decreased 40% from 346 to 209 at December 31, 2001 and 2002, respectively. The Company continues to review all job functions in an effort to improve efficiencies. Management believes that despite the historical losses, it has developed a business plan that can improve the Company's operating results and financial condition in 2003. 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information of continuing operations is as follows (in thousands):
2002 ---- First Second Third Fourth Total -------- -------- -------- --------- --------- Gross written premiums . . . . . . . $43,755 $21,499 $17,449 $ 25,072 $107,775 Net premiums written . . . . . . . . 12,782 5,640 4,169 7,893 30,484 Net premiums earned. . . . . . . . . 11,766 9,876 7,721 8,299 37,662 Total revenues . . . . . . . . . . . 15,280 13,460 11,957 9,314 50,011 Net operating loss From continuing operations (1) . . . (3,102) (4,967) (1,013) (6,965) (16,047) Net loss from continuing operations. (7,729) (9,421) (4,584) (13,526) (35,260) Basic operating loss per share from continuing operations . . . . . (.30) (.48) (.10) (.67) (1.55) Net loss from continuing operations Per share - basic and diluted. . . . (.74) (.91) (0.44) (1.31) (3.40) 2001 ---- First Second Third Fourth Total -------- -------- -------- ------- ------ Gross written premiums . . . . . . . $48,222 $46,868 $27,268 $ 38,734 $161,092 Net premiums written . . . . . . . . 16,829 24,620 14,607 (122) 55,934 Net premiums earned. . . . . . . . . 18,728 23,031 22,839 12,349 76,947 Total revenues . . . . . . . . . . . 22,483 27,858 28,874 16,002 95,217 Net operating loss from Continuing operations (1). . . . . . (5,011) (2,848) (4,029) (2,686) (14,574) Net loss from continuing operations. (9,432) (7,009) (6,824) (7,471) (30,736) Basic operating loss per share from continuing operations . . . . . (.48) (.27) (.39) (.26) (1.40) Net loss from continuing operations Per share - basic and diluted. . . . (.91) (.68) (.66) (.71) (2.96) (1) Operating earnings and per share amounts exclude amortization, interest, taxes, realized capital gains and losses, minority interest, and any extraordinary items.
19. DISCONTINUED OPERATIONS As previously announced, the Company sold its crop insurance operations to Acceptance on June 6, 2001. This business was predominantly written through IGF. The divestiture of the crop insurance segment transferred ownership of crop insurance accounts, effective with the 2001 crop cycle. Management does not expect any remaining crop business to be material to the consolidated financial statements and accordingly has discontinued reporting crop insurance as a business segment. The results of the crop insurance segment have been reflected as "Discontinued Operations" in the accompanying consolidated financial statements. Summarized results of operations and financial position for discontinued operations were as follows: STATEMENTS OF OPERATIONS (in thousands)
Year Ended December 31, 2002 2001 2000 -------- --------- --------- Gross premiums written. . . . . . . . . . . . . . . . . . $ (314) $256,722 $241,748 ======== ========= ========= Net premiums written. . . . . . . . . . . . . . . . . . . $ (5) $ (308) $ 26,466 ======== ========= ========= Net premiums earned. . . . . . . . . . . . . . . . $ 8 $ (308) $ 26,531 Net investment and fee income. . . . . . . . . . . 1,058 1,657 1,229 Net realized capital gain. . . . . . . . . . . . . (2,935) 799 10 -------- --------- --------- Total revenues. . . . . . . . . . . . . . . . . . . . . . (1,869) 2,148 27,770 -------- --------- --------- Loss and loss adjustment expenses. . . . . . . . . 204 3,559 40,690 Policy acquisition and general and administrative expenses. . . . . . . . . . . . . . . . . . . . . . (2,073) 654 2,059 Interest and amortization expense. . . . . . . . . - 91 1,162 -------- --------- --------- Total expenses. . . . . . . . . . . . . . . . . . . . . . (1,869) 4,304 43,911 -------- --------- --------- Loss before income taxes. . . . . . . . . . . . . . . . . - (2,156) (16,141) Income taxes: Current income tax (benefit). . . . . . . . . . . - - - Deferred income tax expense . . . . . . . . . . . - - - -------- --------- --------- Total income tax expense (benefit). . . . . . . . . . . . - - - -------- --------- --------- Loss from operations of discontinued segment. . . . . . . - - (16,141) Loss on disposal of discontinued segment. . . . . . . . . - (2,156) (900) -------- --------- --------- Net loss from discontinued operations . . . . . . . . . . $ - $ (2,156) $(17,041) ======== ========= =========
------------------------------------------------------------------------------- MANAGEMENT'S RESPONSIBILITY ------------------------------------------------------------------------------- Management recognizes its responsibility for conducting the Company's affairs in the best interests of all its shareholders. The consolidated financial statements and related information in this Annual Report are the responsibility of management. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which involve the use of judgement and estimates in applying the accounting principles selected. Other financial information in this Annual Report is consistent with that in the consolidated financial statements. The Company maintains a system of internal controls, which is designed to provide reasonable assurance that accounting records are reliable and to safeguard the Company's assets. The independent accounting firm of BDO Seidman, LLP has audited and reported on the Company's consolidated financial statements for 2002, 2001 and 2000. Their opinion is based upon audits conducted by them in accordance with generally accepted auditing standards to obtain assurance that the consolidated financial statements are free of material misstatements. The Board of Directors, two members of which include outside directors, meets with the independent external auditors and management representatives to review the internal accounting controls, the consolidated financial statements and other financial reporting matters. In addition to having unrestricted access to the books and records of the Company, the independent external auditors also have unrestricted access to the Board of Directors. [GRAPHIC OMITED] [GRAPHIC OMITED] Douglas H. Symons President, Chief Executive Officer and Secretary June 3, 2003 BOARD OF DIRECTORS AND SHAREHOLDERS OF SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES INDIANAPOLIS, INDIANA We have audited the accompanying consolidated balance sheets of Symons International Group, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of earnings (loss), changes in shareholders' equity (deficit) and cash flows for the years ended December 31, 2002, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Symons International Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years ended December 31, 2002, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. The accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency, and as discussed in Note 13 is a party to a number of legal proceedings and claims, that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 17. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in note 12, the Company's insurance subsidiaries are subject to evaluation and regulation under the NAIC Insurance Regulatory Information System (IRIS) and risk-based capital (RBC) requirements for property and casualty insurance companies. The resulting IRIS test results and RBC calculations reported by the subsidiaries as of December 31, 2002, may result in various levels of corrective action, including regulatory control, by the Indiana Department of Insurance and the Florida Department of Insurance. /s/ BDO Seidman, LLP BDO Seidman, LLP Grand Rapids, Michigan May 9, 2003 SHAREHOLDER INFORMATION Corporate Offices Registrar and Transfer Agent Symons International Group, Inc. National City Bank 4720 Kingsway Drive 4100 West 150th Street Indianapolis, Indiana 46205 3rd Floor (317) 259-6300 Cleveland, Ohio 44135-1385 Independent Public Accountants Annual Meeting of Shareholders BDO Seidman, LLP 4720 Kingsway Drive 99 Monroe, Avenue, N.W., Suite 800 Indianapolis, Indiana 46205 Grand Rapids, Michigan 49503-2698 July 11, 2003 at 10:00 A.M. (EST) ANNUAL REPORT ON FORM 10-K: A copy of the Annual Report on Form 10-K for Symons International Group, Inc. for the year ended December 31, 2002, filed with the Securities and Exchange Commission, may be obtained, without charge, upon request to the individual and address noted under Shareholder Inquiries. MARKET AND DIVIDEND INFORMATION As of July 1, 2000 Symons International Group, Inc.'s common stock began trading on the OTC Bulletin Board under the symbol SIGC.OB. Prior to this date the Company's stock was traded on the NASDAQ Stock Market's National Market.
Stock Trading Prices 2002 2001 ----- ----- Quarter Ended High Low High Low ------------- ---- --- ---- ---- March 31 $.09 $ .05 $1.19 $.41 June 30 $.06 $ .03 $ .59 $.35 September 30 $.05 $ .01 $ .51 $.06 December 31 $.06 $ .02 $ .17 $.04
Quotations reflect inter-dealer prices without retail mark-up, markdown or commission and may not represent actual transactions. As of March 31, 2003, the Company had approximately 1,200 shareholders, based on the number of holders of record and an estimate of the number of individual participants represented by securities position listings. Symons International Group, Inc. did not declare or pay cash dividends on its common stock during the years ended December 31, 2002, 2001 and 2000, nor does the Company presently plan to pay cash dividends on its common stock. Dividend payments to the Company by its insurance subsidiaries are subject to restrictions and limitations under applicable laws under which an insurance subsidiary may not pay dividends without prior notice to, or approval by, the subsidiary's domiciling insurance regulator. The indenture relating to the Preferred Securities currently prohibits the payment of dividends on the Company's common stock. See Management's Discussion and Analysis of Financial Condition and Results of Operations and the notes to the Consolidated Financial Statements for additional discussion regarding restrictions on the payment of dividends. SHAREHOLDER INQUIRIES Inquiries should be directed to: Mr. Douglas H. Symons President, Chief Executive Officer and Secretary Symons International Group, Inc. Tel.: (317) 259-6413 Email: dsymons@sigins.com BOARD OF DIRECTORS G. GORDON SYMONS Chairman of the Board Symons International Group, Inc. and Goran Capital Inc. DOUGLAS H. SYMONS President and Chief Executive Officer Symons International Group, Inc. President and Chief Executive Officer Goran Capital Inc. TERRY W. ANKER Chairman of the Board Anthology Companies MICHAEL D. PUCKETT President and Chief Financial Officer CFG Wealth Management EXECUTIVE OFFICERS DOUGLAS H. SYMONS President, Chief Executive Officer and Secretary Symons International Group, Inc. GREGG F. ALBACETE Vice President and Chief Information Officer Symons International Group, Inc. DAVID N. HAFLING Vice President and Chief Actuary Symons International Group, Inc. BRUCE K. DWYER Chief Financial Officer Symons International Group, Inc. COMPANY, SUBSIDIARY AND BRANCH OFFICES CORPORATE OFFICE Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Website: www.sigins.com -------------- SUBSIDIARY AND BRANCH OFFICES Superior Insurance Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Website: www.sigauto.com --------------- Pafco General Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Superior Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Superior Insurance Company 280 Interstate North Circle, N.W., Suite 500 Atlanta, Georgia 30339 Tel: 770-952-4885 Fax: 770-988-8583 IGF Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Superior Insurance Company - Claims Office 1745 West Orangewood Road, Suite 210 Orange, California 92826 Tel: 714-978-6811 Fax: 714-978-0353 Superior Insurance Company - Claims Office 5503 W Waters Avenue, Suite 500 Tampa, Florida 33634 Tel: 813-887-4878 Fax: 813-243-0268 Superior Insurance Company- Claims Office 4500 PGA Boulevard, Suite 304A Palm Beach Gardens, Florida 33418 Tel: 561-622-7831 Fax: 561-622-9741